How do intangible assets with limited useful lives differ from those with indefinite useful lives in terms of accounting treatment?

• A. Intangible assets with indefinite lives are amortized, while those with limited lives are not.
• B. Both types of intangible assets are amortized over a fixed period regardless of their useful life.
• C. Intangible assets with limited lives are amortized over their useful life, while those with indefinite lives are not amortized but are tested annually for impairment.
• D. Neither type of intangible asset is subject to amortization or impairment testing.

Answer: (C)

Verified step by step guidance

1. Understand the concept of intangible assets: Intangible assets are non-physical assets that provide economic benefits to a company, such as patents, trademarks, copyrights, and goodwill.
2. Differentiate between limited useful lives and indefinite useful lives: Intangible assets with limited useful lives have a defined period during which they are expected to generate economic benefits, while those with indefinite useful lives do not have a foreseeable limit to their economic benefit period.
3. Accounting treatment for limited useful lives: Intangible assets with limited useful lives are amortized over their useful life. Amortization is the systematic allocation of the asset's cost over its useful life, similar to depreciation for tangible assets.
4. Accounting treatment for indefinite useful lives: Intangible assets with indefinite useful lives are not amortized because there is no predictable end to their economic benefit period. Instead, they are tested annually for impairment to ensure their carrying value does not exceed their recoverable amount.
5. Summarize the key difference: The primary distinction is that intangible assets with limited useful lives are amortized over their useful life, while those with indefinite useful lives are not amortized but are subject to annual impairment testing.