Bluestone Company Had Three Intangible Assets At The End

Bluestone Company Had Three Intangible Assets At The End Of The Curren

Bluestone Company had three intangible assets at the end of the current year: a patent purchased from Miller Co. on January 1 for $4,000, with an estimated useful life of 10 years; a trademark registered at a cost of $8,500, which management considers to have an indefinite useful life; and computer licensing rights purchased on January 1 for $80,000, expected to have a five-year useful life. This paper discusses the accounting treatment, amortization, and valuation implications of these intangible assets according to GAAP principles.

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Intangible assets are non-physical assets that confer long-term value to a business and are recognized in the financial statements as long-term assets. Proper accounting for these assets involves correct initial recognition, subsequent measurement, and amortization or impairment testing, depending on the nature of the asset.

The first asset described is a patent acquired from Miller Co. for $4,000 with a 10-year estimated useful life. Under GAAP, purchased intangible assets like patents are recognized at cost, which includes purchase price and any legal or registration fees necessary to obtain the asset. The patent should be amortized over its estimated useful life using the straight-line method unless a different pattern more accurately reflects the consumption of economic benefits.

In this case, the $4,000 cost spread evenly over 10 years results in an annual amortization expense of $400 ($4,000 / 10). This amortization systematically reduces the patent's book value, reflecting its consumption over time. The choice of straight-line amortization is typical, providing a consistent expense recognition that aligns with the patent’s utility expectation.

The second asset, a trademark costing $8,500, is registered with the federal government. Since the management estimates the trademark could be worth as much as $210,000 and considers it to have an indefinite useful life, it is not amortized. Under GAAP, intangible assets with indefinite lives are tested annually for impairment rather than amortized. An impairment test checks whether the carrying amount exceeds the fair value; if so, an impairment loss is recognized. This approach prevents amortizing assets that are expected to generate benefits indefinitely, consistent with their nature.

The third asset involves licensing rights purchased for $80,000 with an expected useful life of five years. Licensing rights are finite-lived intangible assets and should be amortized over their estimated useful life. Using straight-line amortization, the annual expense would be $16,000 ($80,000 / 5). After each year, the asset’s carrying amount decreases by this amount, reflecting the consumption of the rights over their useful life.

The accounting implications also extend to valuation considerations. For purchased intangibles, initial recognition at historical cost is straightforward. However, subsequent valuation may involve assessing impairment risks, especially for assets with indefinite useful lives like the trademark. Regular impairment testing ensures that the carrying amount does not exceed recoverable amounts, safeguarding the accuracy of the financial statements.

In addition, companies should disclose relevant information regarding their intangible assets, including amortization methods, useful lives, impairment considerations, and any changes in estimates. Proper disclosure supports transparency and helps users understand the value and status of these assets.

In conclusion, the treatment of Bluestone Company’s intangible assets aligns with GAAP principles: amortize finite-lived assets systematically, test indefinite-lived assets for impairment, and disclose pertinent information. This approach ensures accurate reflection of asset values, income effects, and compliance with accounting standards, providing stakeholders with reliable financial information.

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