Question

Viking Tech Ltd (VT) operates in the information technology industry. VT has a number of transactions relating to intangible assets over the year ended 30 September 2018. (1) On 1 March 2018, VT recognized two new unique brands as intangible assets with the first brand acquired for $78,000 and an internally generated brand for $55.000, VT recognized the internally generated brand by crediting a brand reserve account. Both brands are estimated to have a four-year useful life, although no amortization was recognized in the current year. (ii) VT's patent in the trial balance relates to a product line that received bad publicity ing the year. An impairment review was conducted on 30 September 2018 which concluded that the patent had a value in use of $12 million and a remaining life of only three years. However, on the same date of the impairment review, VT received an offer to sell the patent for $15 million with no selling costs. On 1 October 2017, the patent has a carrying amount of $21 million (with cost of $30 on and accumulated amortization of $9 million) and was being amortised using the straight-line method over a 10-year useful life. (iii) During the year ended 30 September 2018, $228,000 was spent on research and development of two new software products, Odin and Heim by VT and was recognized as research costs. The breakdown of expenditure was: 26,000 Research into product development Development activities Odin Heim 127,600 74,400 228,000 On 1 October 2017 Odin was considered to be commercially viable. Odin was launched on 1 April 2018 and has been selling well. It is estimated that Odin will have a useful life of two years at which point technological advances are likely to have been made which will make the product obsolete. Odin's development costs were incurred between 1 October 2017 and 31 March 2018. Heim has yet to be launched and requires additional development before it can be reasonably expected to generate probable future economic benefits. Required: (a) Discuss whether the two brands identified in (i) can be classified as intangible asset and prepare appropriate journal entries for the brands for VT during the year ended 30 September 2018. (4 marks) (b) Under what circumstance(s), an impairment test has to be performed for an intangible asset with finite useful life. Prepare journal entries for the patent identified in (ii) above for VT during the year ended 30 September 2018. (8 marks) (c) State the six criteria for the development costs to be capitalised in the statement of financial position. Prepare journal entries for the development costs of two software products (if any) identified in (ii) for VT during the year ended 30 September 2018. (8 marks)

Answer 1

Ans (a). Both the brands in (i) can't be recognized as intangible. The first brand acquired for $78,000 can only be recognized.

Journal Entries

Date	Particulars	Amount	Amount
01-03-18	Brand A/c ...Dr. To Brand Reserve A/c	78,000	78,000
30-09-18	Brand Amortization A/c ...Dr. To Brand A/c	19,500	19,500

Ans (b). A test a long-lived asset or asset group for recoverability whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The carrying amount of a long-lived asset isn’t recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset.

An entity should recognize an impairment loss if the carrying amount of the intangible asset isn’t recoverable. And, if it exceeds its fair value. The recorded loss is based on the amount of the asset at the date it’s tested for recoverability. Whether the asset is in use or under development. The impairment loss is measured by the amount that the carrying value of the intangible asset exceeds its fair value.

After an impairment loss is recognized, the adjusted carrying amount of the intangible asset would become its new accounting basis. The guidance prohibits a subsequent reversal of a recognized impairment loss.

Journal Entries

Date	Particulars	Amount	Amount
30-09-18	Impairment Loss A/c ...Dr. To Patent A/c	6,000,000	6,000,000
30-09-18	Amortization of Patents A/c ...Dr. To To Patent A/c	5,000,000	5,000,000
30-09-18	Statement of Profit & Loss A/c ...Dr. To Impairment Loss A/c To Amortization of Patents A/c	11,000,000	6,000,000 5,000,000

Ans (c). Criteria for the development cost to e capitalized in the statement of financial position are: (i) There is a clearly defined project (ii) Expenditure is separately identifiable (iii) The project is commercially viable   (iv) The project is technically feasible (v) Project income is expected to outweigh cost    (vi) resources are available to complete the project.

Journal Entry

Date	Particulars	Amount	Amount
30-09-2018	Odin A/c ...Dr. To Cash/ Bank A/c	127,600	127,600