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Intangible Assets and Amortization

Brian Krogol
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Alright, so, up to this point in this unit, we've been focused on fixed assets that have a physical form, like machinery or land or buildings, things like that, right? But now I want to think about a different type of long term asset, this is an intangible asset. Let's talk about different types of those. So intangible assets. Well, they're intangible, right? They're gonna be long lived assets that they're gonna help us for a long time, but they have no physical form. We can't just go into the factory and say, hey, there's our machine, no, it's, there's no physical form, but they give special rights to the company and they are assets of the company. Okay, so we're gonna discuss what all the a lot of the most common types of intangible assets are, but there's 22 ways that we deal with intangible assets. The first type of intangible assets are gonna be intangible assets with limited lives. Okay, so these don't last forever. They're gonna have some sort of useful life similar to when we were dealing with fixed assets. Okay, so these limited live intangible assets. What we're gonna do is we're going to do amortization. We're gonna advertise these, these intangible assets over there useful lives. Now, amortization, it's just another fancy word that we use for depreciation. Okay, so amortization is just the word we use, when we're, when we're depreciating are intangible assets. Okay, so when we have an intangible asset with a limited life, we say, we advertise it. Okay, and when we do intangible assets and we advertise them in a very similar way to depreciation, it's always going to be on a straight line basis. You're not gonna see us using decline, double, declining balance or units of production. No, when we deal with it, it's just gonna be on a straight line basis. So this actually ends up being super easy, as long as you know what it is. The only difference is we're not gonna have an accumulated amortization account. Remember when we are dealing with depreciation expense, we always had this contra asset of accumulated depreciation? Well in this case there is no accumulated amortization account, there's no such thing. Okay, what we do is we just directly credit the intangible asset itself, right? The assets gonna have some debit value, just like all assets. And then as we advertise it as we do amortization expense, that goes to the income statement, well, we're the credit, we're gonna be debating amortization expense and we're going to credit the asset itself the intangible assets, so it's gonna lower the value that way. Cool. So that's the first type of intangible asset and that's mostly what you're going to deal with in this class is just simple amortization problems where you're gonna be calculating calculating very similar to straight line depreciation. The other type are intangible assets with unlimited lives. Okay? And we're gonna talk about some of these because they still like to, you know, test your vocabulary and test how you know about these unlimited life intangible assets, but they are not advertised right? Because they last forever. So there's no reason for us to be advertising them over a certain time period if they're gonna last for essentially forever. But what we are going to do with these is we're gonna annually test them for impairment of value, right? Because maybe they aren't worth what they are on our books. So we're gonna have some special tests to impair them. If we see that they've lost value. We're not going to talk about those in this lesson. We're going to focus on limited live assets and how we do amortization expense as well as we're gonna talk about the different types of intangible assets here. Okay, So there's gonna be many different types of intangible assets. So why don't we start with the most common one. And in this video we'll go ahead and calculate an amortization expense and then we'll pause and we'll talk about all the different types of assets of intangible assets. Cool, so the first one here, that one you're probably going to deal with the most is patents when the company patents an idea something uh some sort of special thing they came up with. Well, it's the exclusive right to produce And sell an invention for and the US government gives you a patent for 20 years. Okay, so you get this special right to produce it and sell it for 20 years. However the useful life might not be the same as the life that the The government gives you this patent for right. Maybe you you've made this patent for 20 years. But competitors come to the market and start copying and selling similar assets to your similar ideas to your idea much faster. Think about, you know, when those first smartphones came out? Maybe I'm not exactly sure, but I'm guessing the iPhone might have been the first one that came out and it revolutionized the industry and then all sorts of similar products came out and started eating up its profits as well. Right? Even though they still had the market on the iphone, while there were other similar products that may be decreased the value of the iphone patent since it wasn't the only one on the market anymore. So the useful life of a plant patent Maybe less than 20 years. Okay. But they're gonna have to tell you that in the problem. They'll say something something like the government granted a 20 year useful life. But the company only expects it to be useful for 15 years for 10 years, for eight years, whatever it might be. They're gonna have to give you that information in the problem. All right. So let's check out this this quick problem right here about amortization expense. And then we'll talk about the rest of the assets in the next video. Techno Cor purchased the patent from invent a court for 170,000 on January one. So there we go. That's gonna be the cost, right? That's gonna be the cost of the patent and techno court believes it will be able to produce the product for five years before competition renders the patent obsolete. Alright. So that's just what we were talking about. It's not gonna get the full life of the patent. They're only gonna get five years of value before competitors start figuring out what they're doing. So, we want to journal eyes the purchase of the patent when we first bought it and then amortization expense for the year. All right. So let's go ahead. The first thing we wanna do is the purchase. So let's do the purchase over here. And what do you guys think this journal entry is going to look like it's much like many different journal entries that we've done in the past. We're purchasing something here, but we're purchasing a patent. So what do you think the debit is going to be in this transaction? We're going to debit patents, right? This intangible asset that we have? We're going to debit patents because we got a patent and what do you think the debits gonna be for? It's gonna be for that $170,000 right? We paid 100 $70,000. And what do you think the credit is going to be in this transaction? Well, we paid for it with cash, right? We paid for this patent. So we're going to credit our cash for 100 and $70,000. All right. So that's when we first purchased the the asset, this intangible asset and now it's time to advertise it. So when how long are we gonna advertise this asset for? Is it gonna be the 20 years that the government gives us the patent? No, it's the five year useful life that we've determined. Right, so we're gonna use our straight line method. And one thing to note is with these intangible assets. Well, if it's going to be obsolete after these five years, there's not gonna be any salvage value. We generally don't talk about salvage value or residual value. When we do intangible assets. We just take the whole amount and depreciate. Excuse me? Depreciate, advertise the entire thing. 170,000 divided by five. So what's gonna be our annual amortization expense? 1 70 divided by five. Well, we're gonna advertise 34,000 per year. That's gonna be our amortization expense. So notice it's straight line basis and it's actually really simple. So let's do that amortization entry. So that entry. Well, what's gonna be our debit our expense, right? We're gonna have amortization expense and I'm gonna shorten it to a more expense. Okay expense. This is going to the to the income statement and it's for 34,000 as a debit. Right? So that's gonna lower our income, amortization expense. Has a debit. What about our credit is it accumulated? Amortization? No. Right? We don't have an accumulated amortization account. We just directly lower the value of the patent. So we're gonna credit patents here to lower the value of the patent by the 34,000. And it's as simple as that. That's all we have to do for amortization and we're gonna make that same entry every year. Okay, So there's our amortization and there's our purchase entry. So what happened here? We purchased the patent For 170,000 And cash. We had go out for 170,000. So nothing really happened in our assets in that first situation, right? We just paid for for an asset. So we got rid of cash and we got an asset. So our assets stayed the same level, just changed what they were. And then in that second entry, while our patents went down, right? We took 34,000 out of our patents. So those went down by 34,000 and that amortization expense. Well that lowers our equity, right? Because it went to the income statement and it was a decrease in art in our income. So the amortization, It's gonna come out here in our equity for 34,000 and that keeps our equation balanced, right? Because we had a decrease in our assets of 34,000 after the amortization and a decrease in our equity. So everything stays balanced there. Alright. So let's pause here and then we'll talk about the remaining types of intangible assets that you're likely to come across. All right, let's do that now.