Indefinite useful life

Indefinite useful life

When an asset has indefinite use full life than it is not amortized rather it is checked for impairment annually.

Example # 1

ABC & company got patent right at once and this arrangement is not to be renewed. The cost of Patent right was $ 20 Million. The fair value next year was decreased $ 15. How this situation will be account for in the books of accounts.

Solution

1. Initial Recognition

The asset is to be recognized at the cost in first place.

Date	Particulars	Dr	Cr.
	Patent Rights	$ 20 Million
	Cash		$ 20

2. Amortization at year end

There is no amortization as the asset has indefinite useful life.

3. Impairment check next Year

There is indication of impairment as carrying amount is exceeding the fair value.

Date	Particulars	Dr	Cr.
	Impairment	$ 5 Million
	Patent Rights		$ 5

Amortization of Intangible Asset

Amortization of Intangible Asset

The amortization is just another name of depreciation. The intangible is amortized over its useful life and amortization starts when the asset is available to use.

Example # 1

ABC & Co purchase accounting software for $ 30,000 and the software will be re licensed after three years. You are required to amortize the assets.

Solution

Asset is to be amortized over the pattern of asset utilization, however, in case no pattern can be established then assets is amortized using straight line method. In this example no information is available that how the asset will be utilized therefore straight line method is used.

1. Calculation of Amortization Rate

Cost	$ 30,000
Useful life	3 Years
Amortization ( $ 30,000/3)	$ 10,000

2. Journal Entry for Amortization

Date	Particulars	Dr .	Cr.
First Year	Amortization	$ 10,000
First Year	Intangible Assets		$ 10,000
2nd Year	Amortization	$ 10,000
2nd Year	Intangible Assets		$ 10,000
3rd Year	Amortization	$ 10,000
3rd Year	Intangible Assets		$ 10,000