Pendergrass Company hires an accounting intern who says that intangible assets should always be amortized over their legal lives. * Is the intern correct?
No, this is incorrect. Intangible assets should not “always” be amortized over their legal lives. * Explanation
Intangible assets are defined as Rights, privileges, and competitive advantages that result from the ownership of long-lived assets that do not possess physical substance. The intangible assets are amortized over the established legal life or the years of its useful life, whichever ends first. According to Kieso, Kimmel, and Weygandt (2010) intangible assets should be amortized over their legal lives. However, the accounting clerk is stating that intangible assets should “always” be amortized over their legal lives; however, intangible assets with limited lives are amortized and intangible assets with indefinite lives are not amortized. Therefore, it depends on whether the intangible asset is defined over their legal lives or indefinite lives. * What are the basic issues related to accounting for intangible assets?
The process of allocating the cost of intangible assets to expense is called amortization and intangible assets are typically amortized on a straight-line basis. To record amortization of an intangible asset, a company increases (debits) Amortization Expense, and decreases (credits) the specific intangible asset. Company’s record intangible assets at cost and intangible assets are categorized as having either a limited life or an indefinite life. If an intangible has a limited life, the company allocates its cost over the asset’s useful life using a process similar to depreciation. The process of allocating the cost of intangibles is referred to as amortization. The cost of intangible assets with indefinite lives should not be amortized (pg.415).
Reference
Weygandt, J.