Multiple Choice
Which of the following properly describes the accounting for a patent?
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8. Long Lived Assets
Intangible Assets and Amortization
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A limited life intangible asset is reported on the balance sheet at:
A
fair market value
B
cost plus accumulated amortization
C
cost less accumulated amortization
D
cost less accumulated depreciation
Verified step by step guidance1
Understand the nature of the intangible asset: A limited life intangible asset is one that has a finite useful life, such as a patent or copyright. These assets are subject to amortization over their useful life.
Recall the accounting treatment: Limited life intangible assets are initially recorded at their cost, which includes the purchase price and any directly attributable costs necessary to prepare the asset for its intended use.
Apply the concept of amortization: Over time, the cost of the intangible asset is systematically allocated as an expense (amortization) over its useful life. This reduces the book value of the asset on the balance sheet.
Determine the reporting value: The value of the limited life intangible asset on the balance sheet is calculated as the original cost minus the accumulated amortization to date. This reflects the net book value of the asset.
Clarify the distinction: Note that 'accumulated depreciation' applies to tangible assets, not intangible assets. Therefore, the correct reporting value is 'cost less accumulated amortization,' not 'cost less accumulated depreciation.'
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