Problem 15 2
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problem 15-2. Doug Gregory. Problem. Three intangibles acquired by Hamm Ltd. (HL) in the current year are described below. HL, a progressive company with a variety of divisions and subsidiaries, has applied fair value measures on its balance sheet wherever permitted.

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Problem 15 2

problem 15-2

Doug Gregory


Problem

Problem

  • Three intangibles acquired by Hamm Ltd. (HL) in the current year are described below. HL, a progressive company with a variety of divisions and subsidiaries, has applied fair value measures on its balance sheet wherever permitted.

  • Question A: Does each intangible as described above qualify to be recognized as an intangible asset? Explain briefly.

  • Question B: Identify the appropriate method of accounting for each intangible described above after acquisition, and explain the decisions you have made.


Intangible assets

Intangible Assets

  • Defined as “an identifiable non-monetary asset without physical substance.”

  • Three aspects to consider:

    • Identifiability

      • Can be separated from the entity and sold, transferred, licensed, rented, or exchanged; or

      • Based on contractual or other legal rights, regardless of whether it is separable from the entity or other rights or obligations

    • Control by an entity

    • Future economic benefits


Recognition

Recognition

  • Recognized as an intangible asset when the following two are met:

    • It is probable, using management’s best estimates of conditions that will likely exist, that the expected future benefits will be realized, and

    • The cost of the asset can be reliably measured.


Intangible 1 and answer

Intangible 1 and Answer

  • Intangible 1 is a license granted by the federal government to HL, that allows the company to provide essential services to a key military installation overseas. The license expires every five years, but is renewable indefinitely at little cost. Because of the profitability associated with this license, HL fully expects to renew it continually. The license is very marketable and will generate cash flows indefinitely.

  • Answer A: Not an Intangible Asset. The costs associated with obtaining and renewing the license are selling, administrative, and other general overhead costs that should be expensed as incurred.

  • Answer B: N/A


Intangible 2 and answer

Intangible 2 and Answer

  • Intangible 2 is a non-competition covenant acquired by HL when the company bought out a major owner-managed competitor. The seller signed a contract in which she agreed not to set up or work for another business that is in direct or indirect competition with HL. The projected cash flows resulting from this agreement are expected to continue for at least 25 years.

  • Answer A: Intangible Asset. Based on contractual rights, HL has control, and future economic benefits are likely as a result of the covenant.

  • Answer B: Account for using the cost model and amortize over it’s useful life.


Intangible 3 and answer

Intangible 3 and Answer

  • Intangible 3 is medical files. One of HL’s subsidiary companies owns several medical clinics. A recent purchase of a retiring doctor’s practice required a significant payment for the practice’s medical files and clients. HL believes that this base will benefit the business for as long as it exists, providing cash flow immediately.

  • Answer A: Intangible Asset. Identifiable (purchased separately from clinic), HL has control, and future economic benefits exist.

  • Answer B: Account for using the cost model and amortize over the files useful life.


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