Question

Option #2: Accounting for Intangible Assets and Natural Resources Part 1 a. Assume you are the chief accountant of Exxon Mobil. Describe to the Board of Directors the accounting for natural resources, including their acquisition, and cost allocation (depletion). Use a real-world example to explain your answers. b. Assume you are the chief accountant of Microsoft Corporation, Describe to the Board of Directors the accounting for intangible assets, including their acquisition and cost allocation (amortization). Use an example in your explanations. c. On June 1, ABC Inc. purchased a patent for $75,000 with a useful life of 10 years. Prepare the journal entry to amortize the patent at the end of the first year assuming ABC Inc. follows a calendar year. d. On January 4, ABC Inc. purchased a music distributor's collection of lyrics and songs for $425,000. The copyrights are expected to last another ten years. Prepare the journal entry to amortize the copyright at the end of the first year.

Answer 1

Answer a) As a chief accountant of Exxon mobil

Natural resources are mineral deposits, timber stands etc. These are also known as wasting assets.

Acquisition of natural resources

Actual cost incurred for acquisition XXX

Add : Exploration cost

Add: Development cost

Total cost of acquisition

In balance sheet it is reported as total cost less accumulated depletion

Depletion of natural resources

Depletion value = Cost of natural resources - Expected residual value

When this depletion value divided by estimated units them depletion per unit will arrive.

Real word example

A company purchased a mine site of $600,000 and spent $ 200,000 on developing the site for production. Ans site has estimated 200,000 tons. site can be sold as a recreational lake site for a estimated $ 100,000

Purchase cost $600,000

Development cost $200,000

Total    $800,000

Less : Estimated residual value $100,000

Depletion value = $700,000

Divided by 200,000 tons so depletion rate per ton is 700,000/200,000= $3.5

Answer B) As a chief accountant of Microsoft corporation :

An intangible asset is an asset that is not physical in nature. Goodwill, brand recognition and intellectual property, such as patents, trademarks, and copyrights, are all intangible assets. Intangible assets exist in opposition to tangible assets, which include land, vehicles, equipment, and inventory.

Intangible assets are recorded as below,

I)Purchased Intangible assets(IA)

Purchase price XXXXX

+ taxes on purchase    XXXXX

-refundable taxes XXXXX

+expenses on valuation    XXXXX

+expenses of title expenses    XXXXX

Value of IA XXXXX

II)Acquired in exchange:

Fair value of intangible assets obtained $20,000 or Fair value of intangible assets surrendered $ 22,000 whichever is more that is $22,000

Amortization of IA

carrying amount of IA should be written off in ratio of future economic benefits over estimated life. and if ratio of benefits is not mentioned than straight line method is to be applied for amortization

Answer C)

.Patent

Amortization expense - Patent a/c          Dr. 4375

              To Patent                            4375

75000/10 = 7500 x 7/12 = 4375

Answer D)

Copyrights

Amortization expense - Copyright a/c          Dr. 42500     

                    To Copyright                                     42500

425000 / 10 = 42500

Answer part 2)

Tangible assets are depreciated;Intangible assets are amortized ; Natural resources are depleted

1. Goodwill - N

2. Land -N - Land only appreciates

3.Buildings - D

4.Patents - A

5.Copyrights - A

6.Research and development costs - N

7.Timberlands - P

8.Franchises (indefinite life) - N - Instead of amortization, indefinite-life assets are evaluated for impairment yearly.

9. Licenses (limited life) - A

10 .Land Improvements - D

11.Oil Deposits - P

12.Equipment - D