Learning Outcomes
- Record amortization of intangible assets
By now, you should be able to predict what the journal entry for amortization will look like.
Let’s look at an example. A patent is a right granted by the federal government. This exclusive right enables the owner to manufacture, sell, lease, or otherwise benefit from an invention for a limited period. The value of a patent lies in its ability to produce revenue. Patents have a legal life of 14–20 years.
When purchasing a patent, a company records it in the Patents account at cost. The firm also debits the Patents account for the cost of the first successful defense of the patent in lawsuits (assuming an outside law firm was hired rather than using internal legal staff). Such a lawsuit establishes the validity of the patent and thereby increases its service potential. In addition, the firm debits the cost of any competing patents purchased to ensure the revenue-generating capability of its own patent to the Patents account.
The firm would amortize the cost of a purchased patent over its finite life which reasonably would not exceed its legal life. If a patent cost $40,000 and has a useful life of 10 years, the journal entries to record the patent and periodic amortization (assuming a full year) are:
| Date | Description | Post. Ref. | Debit | Credit |
|---|---|---|---|---|
| 20– | ||||
| Mar. 1 | Patent | $40,000.00 | ||
| Mar. 1 | Checking accounting | $40,000.00 | ||
| Mar. 1 | To record purchases of patent. |
| Date | Description | Post. Ref. | Debit | Credit |
|---|---|---|---|---|
| 20– | ||||
| May 15 | Amortization expense | $4,000.00 | ||
| May 15 | Patents | $4,000.00 | ||
| May 15 | To record annual patent amortization. |
Notice that we don’t always use a contra account to record amortization of intangibles; however, if we look at the second half of Albemarle’s Note 12 on goodwill and intangibles, we see the company does keep track of amortization separately. Because they are reporting it in the annual report, we can assume they are using separate GL accounts for the accumulated amortization.
| Customer Lists and Relationships | Trade Names and Trademarks [a] | Patents and Technology | Other | Total | |
|---|---|---|---|---|---|
| Subcategory, Gross Asset Value | |||||
| Balance at December 31, 2017 | $ 439,312 | $18,981 | $61,618 | $37,256 | $557,167 |
| Foreign currency translation adjustments and other | (10,940) | (528) | (5,817) | 6,452 | (9,483) |
| Balance at December 31, 2018 | Single Line428,372 | Single Line18,453 | Single Line55,801 | Single Line43,708 | Single Line546,334 |
| Foreign currency translation adjustments and other | (5,910) | (366) | (781) | (2,426) | (9,483) |
| Balance at December 31, 2019 | Single Line$422,462Double Line | Single Line$18,087Double Line | Single Line$55,020Double Line | Single Line$41,282Double Line | Single Line$536,851Double Line |
| Subcategory, Accumulated Amortization | |||||
| Balance at December 31, 2017 | $(74,704) | $(8,295) | $(35,203) | $(17,462) | $(135,664) |
| Amortization | (23,402) | — | (1,450) | (3,127) | (27,979) |
| Foreign currency translation adjustments and other | 2,309 | 119 | 1,405 | (381) | 3,452 |
| Balance at December 31, 2018 | Single Line(95,797) | Single Line(8,176) | Single Line(35,248) | Single Line(20,970) | Single Line(160,191) |
| Amortization | (23,020) | — | (1,388) | (2,714) | (27,122) |
| Foreign currency translation adjustments and other | 2,068 | 238 | 439 | 2,339 | 5,084 |
| Balance at December 31, 2019 | Single Line$(116,749)Double Line | Single Line$(7,938)Double Line | Single Line$(36,197)Double Line | Single Line$(21,345)Double Line | Single Line$(182,229)Double Line |
| Net Book Value at December 31, 2018 | Double Line$332,575 | Double Line$10,277 | Double Line$20,553 | Double Line$22,738 | Double Line$386,143 |
| Net Book Value at December 31, 2019 | Double Line$305,713 | Double Line$10,149 | Double Line$18,823 | Double Line$19,937 | Double Line$354,622 |
| [a] Net Book Value includes only indefinite-lived intangible assets | |||||
| Useful lives range from 13–25 years for customer lists and relationships; 8–20 years for patents and technology; and primarily 5–25 years for other | |||||
| Amortization of other intangibles aounted to $27.1 million, $280 million, and $25.1 million for the years ended December 31, 2019, 2018, and 2017 respectively. Included in amortization for the years ended December 31, 2019, 2018, and 2017 is $19.5 million, $19.7 million, and $17.7 million, respectively, of amortization using the pattern of economic benefit method. | |||||
Also, notice they do not amortize trade names and trademarks (nor do they amortize goodwill) because there is no determinable useful life. Note that the company uses the “pattern of benefits” method of calculating amortization (matching the expense to future cash flows/revenues).
The total net book value of other intangibles (historical cost minus accumulated amortization) of $354.622 million at December 31, 2019 is equal to the number on the balance sheet. As accountants, it’s imperative that our sub schedules and subsidiary ledger always tie to control accounts.
See the balance sheet long description here.
PRACTICE QUESTION
