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Amortization of Intangible Assets
Like many fixed assets, intangible assets have limited useful lives. Accordingly, the cost of these assets must be allocated as an expense to the years when they help generate revenue. With fixed assets, this expense was labeled “depreciation.” Amortization expense is the term used for intangible assets. It is usually calculated on a straight-line basis and the maximum amortization period is 40 years.
Suppose, for example, the patent acquired above for $300,000 was estimated to have a six-year life. Amortization expense in the amount of $50,000 ($300,000/6) would be recorded each year.
Unlike fixed assets, no contra asset account is used and the asset account patents is reduced directly. Case study 6.1 addresses the issues of capitalization and amortization.
Case Study 6.1
As described in figure 6.7, StorageTek capitalizes certain software development costs. Because firms outside of the computer industry expense all their research and development costs, StorageTek’s financial statements may not be comparable to those of firms in other industries. In 1997, StorageTek reported the following results (dollars in thousands):
Income before taxes = $316,117
Provision for income taxes = 84,300Net income = $231,817
Required
Based on the information contained in figure 6.7, recalculate StorageTek’s net income to reflect the immediate expensing of all software development costs.
Solution
Because StorageTek has capitalized less software development costs in recent years, the amortization of prior years’ capitalized costs exceeds the capitalized value of the current year’s costs. The net result is that adjusted income actually exceeds reported income.
*Using StorageTek’s approximate effective tax rate = $84,300 / $316,117 = .27
Provision for income taxes = $336,198 X .27 = $90,773
Intangible Assets Topics
Related Noncurrent Assets Topics
