Question

15. Intellectual property (generally in the form of patents) is critically im- portant in certain industries. Assume that a company is debating whether to acquire a certain patent from another company or "design around the patent in its own laboratories. Describe the accounting methodology and implications for each of these two alternatives.

Answer 1

Intellectual property (which is generally in the form of patents) are intangible asset. It is important because it protects the rights of industry from copying and also help in creating a brand name.

Situation 1 - Acquisition

Here we assume that Intellectual property in purchased from X Ltd

Accounting Entry when purchased from X Ltd

Intellectual Property A/c Dr.

To X Ltd A/c Cr.

(Being Intellectual Property acquired from X Ltd)

X Ltd A/c Dr.

To Bank A/c Cr.

(Being payment made to X ltd for purchase of Intellectual Property)

Situation 2 - Creating Own Intellectual Property

When Intellectual property is created in own laboratory all the expenses towards its research and legal expenses towards registration of it need to be capitalized.

Accounting Entry is as follows

Intellectual Property A/c Dr.

To Bank A/c Cr

(Being all expenses related to research like lab expenses, salaries and overheads for Intellectual Property are capitalized)

Intellectual Property A/c Dr.

To Bank A/c Cr

(Being all legal expenses related to registration of Intellectual Property are capitalized)