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MGT401 Financial Accounting 2 , GDB # 1 Opening date November 18, 2014, Closing date November 20, 2014 (5 marks)

Important announcement

Graded Discussion Board

Financial Accounting II (MGT401)

 

Dear Students!

This is to inform that Graded Discussion Board (GDB) No. 01 will be opened on  November 18, 2014 for discussion and last date for posting your discussion will be November 20, 2014.

Topic/Area for Discussion

 “Intangible Assets”

This Graded Discussion Board will cover first 08 lessons.

Graded Discussion Board

Financial Accounting II (MGT401)

Topic: Intangible assets
 

Question: 
 

K&S (Pvt) Ltd. has recently established its business of readymade garments in Lahore. Mr. Aslam - owner of the company has tried to launch state of the art processes at every step from product design to manufacturing. K&S (Pvt) Ltd. needed funds aggregating to Rs. 2 Million, half of the amount was invested by owner and remaining requirement was fulfilled by obtaining debt from bank. During the financial year 2014-15, K&S (Pvt) Ltd. incurred the costs on:

a)      Preoperative expenses

b)      Promotional activities

c)      Designs and testing of prototypes

d)     legal fee to acquire the copyrights

e)      employee’s training


Required:
 Which of the above mentioned costs are eligible for capitalization as an intangible asset ? Justify your answer by giving valid points.


Important Instructions:

1. The GDB will remain open for 3 working days/ 72 hours.

2. Do not copy or exchange your answer with other students. Two identical / copied comments will be marked Zero (0) and may damage your grade in the course.

3. Obnoxious or ignoble answer should be strictly avoided.

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Replies to This Discussion

INTANGIBLE ASSET'
An asset that is not physical in nature. Corporate intellectual property (items such as patents, trademarks, copyrights, business methodologies), goodwill and brand recognition are all common intangible assets in today's marketplace. An intangible asset can be classified as either indefinite or definite depending on the specifics of that asset. A company brand name is considered to be an indefinite asset, as it stays with the company as long as the company continues operations. However, if a company enters a legal agreement to operate under another company's patent, with no plans of extending the agreement, it would have a limited life and would be classified as a definite asset.

EXPLAINS '


While intangible assets don't have the obvious physical value of a factory or equipment, they can prove very valuable for a firm and can be critical to its long-term success or failure.

For example, a company such as Coca-Cola wouldn't be nearly as successful were it not for the high value obtained through its brand-name recognition. Although brand recognition is not a physical asset you can see or touch, its positive effects on bottom-line profits can prove extremely valuable to firms such as Coca-Cola, whose brand strength drives global sales year after year.

Following are the common intengible assets:

Goodwill

Goodwill is an intangible which is recognized when a business acquires another business. It represents the excess of cost paid by the purchasing business to the purchased business over the fair value of purchased business identifiable assets.

Example:

Tennis Ltd. acquired Racket Ltd. for $10 million. The fair value of Racket's net assets (assets minus liabilities) equaled $8 million at the time of purchase. The difference between the cost of $10 million paid by Tennis and $8 million fair value of the assets of Racket is goodwill which amounts to $2 million. Goodwill is an intangible asset and represents Racket's business reputation, etc.

Copyrights

Copyrights grant a business sole authority to reproduce and sale a software, book, magazine, journal, etc.

Patents

Patents grant a manufacturing and research company control over the use and sale of a specific design in manufacturing process, etc.

Amortization of Intangible Assets

Amortization is the process of expensing out intangible assets over their useful life. It is in effect the depreciation of intangible assets.

Some intangible assets have indefinite or unlimited useful life, such as goodwill. Such assets are not amortized. Others have a definite useful life and are amortized over their useful life. Most of intangible assets are amortized using straight line method. Useful life is the shorter of legal life and economic life.

Example:

Innovative Gadgets Ltd. patented one of their products at a cost of $100,000. The patent is enforceable for 10 years, so the legal life is 10 years. However, the company expects to produce the patented product for only 5 years and expects to replace it with an advanced version at the end of 5 years. The company uses straight line method of amortization. The company is required to amortize the patent over 5 years which is the shorter of legal life and economic life and hence per year amortization would be $20,000 ($100,000/5).

Although intangible assets with unlimited useful life are not amortized, they are periodically tested for impairment.

Preoperating expenses

Preoperative expense is expense incurred before starting operation of business i.e. Commercial operation all expense whether it is salary , fee of engineer , all expense which is necessary to start the operation needs to be capitalized under plant or building or machinery etc. Preliminary & preoperative are different. Preliminary is before incorporation of business while preoperative is after.

Promotional Activities

Promotion refers to raising customer awareness of a product or brand, generating sales, and creating brand loyalty. Promotion is also found in the specification of five promotional mix or promotional plan. These elements are personal selling, advertising, sales promotion, direct marketing, and publicity.

Prototype:

Definition: A replica of a product as it will be manufactured, which may include such details as color, graphics, packaging and instructions

One of the essential early steps in the inventing process is creating a prototype--which, simply defined, is a three-dimensional version of your vision. But what exactly should a prototype look like? First, it depends on your idea. Second, it depends on your budget and your goals. If possible, it's great to start with a handmade prototype, no matter how rudimentary. We've seen prototypes made from the simplest of household items: socks, diaper tabs, household glue, empty milk containers--you name it. If it works for your initial demonstration purposes, it's as good as the most expensive materials.

Eventually, if you decide to move forward with your invention, you'll probably need what's known as a "pre-production" prototype--especially if you plan to manufacture it yourself rather than license it. But as a first step, a homemade "presentation" prototype can give you a good running start.

In this case legal fee to acquire the copy rights is eligible for the capitalization as an intangible asset. Because,It is resource controlled by the entity from which future economic benefits are expected to flow to the entity, lack physical substance, are identifiable, the cost of the assets can be measured reliably.     

Tariq brother is  question men just " legal fee to acquire the copy rights e aye ga"

Capitalization k lyey??

Or koi point nei aye ga please help

thanxxx for shuring....

Saba is question men just" legal fee to acquire the copy rights e aye ga"

Capitalization k lyey??

help is required

aoa friend akhir iss mdb mai karnna kia hai 

Intangible Asset
An asset that is not physical in nature. Corporate intellectual property (items such as patents, trademarks, copyrights, business methodologies), goodwill and brand recognition are all common intangible assets in today's marketplace. An intangible asset can be classified as either indefinite or definite depending on the specifics of that asset. A company brand name is considered to be an indefinite asset, as it stays with the company as long as the company continues operations. However, if a company enters a legal agreement to operate under another company's patent, with no plans of extending the agreement, it would have a limited life and would be classified as a definite asset.

Goodwill

Goodwill is an intangible which is recognized when a business acquires another business. It represents the excess of cost paid by the purchasing business to the purchased business over the fair value of purchased business identifiable assets.

Example:

Tennis Ltd. acquired Racket Ltd. for $10 million. The fair value of Racket's net assets (assets minus liabilities) equaled $8 million at the time of purchase. The difference between the cost of $10 million paid by Tennis and $8 million fair value of the assets of Racket is goodwill which amounts to $2 million. Goodwill is an intangible asset and represents Racket's business reputation, etc.

Copyrights

Copyrights grant a business sole authority to reproduce and sale a software, book, magazine, journal, etc.

Patents

Patents grant a manufacturing and research company control over the use and sale of a specific design in manufacturing process, etc.

Amortization of Intangible Assets

Amortization is the process of expensing out intangible assets over their useful life. It is in effect the depreciation of intangible assets.

Some intangible assets have indefinite or unlimited useful life, such as goodwill. Such assets are not amortized. Others have a definite useful life and are amortized over their useful life. Most of intangible assets are amortized using straight line method. Useful life is the shorter of legal life and economic life.

Example:

Innovative Gadgets Ltd. patented one of their products at a cost of $100,000. The patent is enforceable for 10 years, so the legal life is 10 years. However, the company expects to produce the patented product for only 5 years and expects to replace it with an advanced version at the end of 5 years. The company uses straight line method of amortization. The company is required to amortize the patent over 5 years which is the shorter of legal life and economic life and hence per year amortization would be $20,000 ($100,000/5). Although intangible assets with unlimited useful life are not amortized, they are periodically tested for impairment.





In the above case legal fee to acquire the copy rights is eligible for the capitalization as an intangible asset. Because,It is resource controlled by the entity from which future economic benefits are expected to flow to the entity, lack physical substance, are identifiable, the cost of the assets can be measured reliably.

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