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(classification-issues intangible assets) Joni hyde inc. has the following amount reported in its general ledger at the end of the current year.

1) Organization costs $24,000
2) trademark. 15,000
3) discount on bonds payable 35,000
4) deposits with advertising agency for ads to promote goodwill of company 10,000
5) excess of cost over fair value of net identifiable assets of acquired subsidiary $75,000
6) cost of equipment acquired for research and development projects, the equipment has an alternative future use $90,000
7) cost of developing a sacret formula for a product that is expected to be marketed for atleast 20 years. $80,000

Instructions
a) on the basis of the information above, compute the total amount to be reported by Hyde for intangible assets on its balance sheet at the year end.
b) if an item is not to be included as intangible assets, explain its proper treatment for reporting purposes.

1 answer

To determine the total amount to be reported by Joni Hyde Inc. for intangible assets on its balance sheet, we will analyze each item listed and classify them as intangible or not, along with their treatment:

a) Calculation of Intangible Assets

  1. Organization Costs: $24,000

    • Treatment: Generally, organization costs are not capitalized as intangible assets and should be expensed as incurred.

  2. Trademark: $15,000

    • Treatment: This is a definite intangible asset and can be capitalized. Included.

  3. Discount on Bonds Payable: $35,000

    • Treatment: This is not an intangible asset; it relates to financial instruments. Properly classified as a contra-liability.

  4. Deposits with Advertising Agency for Ads to Promote Goodwill of Company: $10,000

    • Treatment: Advertising costs are typically expensed as incurred and are not considered intangible assets. Not included.

  5. Excess of Cost Over Fair Value of Net Identifiable Assets of Acquired Subsidiary: $75,000

    • Treatment: This represents goodwill, which is an intangible asset. Included.

  6. Cost of Equipment Acquired for Research and Development Projects (with alternative future use): $90,000

    • Treatment: Since the equipment has alternative future use, it is a tangible asset and not classified as an intangible asset. Not included.

  7. Cost of Developing a Secret Formula for a Product Expected to be Marketed for at least 20 Years: $80,000

    • Treatment: As long as it meets certain criteria and if it is considered to have a definite useful life, it can be capitalized as an intangible asset. Included.

Total Intangible Assets Calculation

  • Trademark: $15,000
  • Goodwill (Excess of Cost over Fair Value): $75,000
  • Secret Formula: $80,000

Total Intangible Assets = $15,000 + $75,000 + $80,000 = $170,000

b) Explanation of Non-Included Items

  1. Organization Costs: These costs are generally not capitalized because they are considered to be initial expenses associated with the incorporation or setup of a company rather than future economic benefits. They should be expensed in the period incurred.

  2. Discount on Bonds Payable: This is classified as a liability and reduces the carrying amount of bonds. It should be shown as a deduction from the bond liability on the balance sheet instead of as an intangible asset.

  3. Deposits with Advertising Agency: Advertising expenses are incurred to maintain or increase brand visibility but do not result in a long-term identifiable asset. As such, these costs should be expensed when incurred, thereby not appearing on the balance sheet as an intangible asset.

  4. Cost of Equipment for R&D: Since the equipment has an alternative future use, it should be classified as a tangible asset and capitalized as property, plant, and equipment, rather than an intangible asset.

By following the treatment outlined above, Joni Hyde Inc. should report $170,000 in intangible assets on its balance sheet at year end.