FACULTY OF BUSINESS

AND ECONOMIC SCIENCES

FINANCIAL ACCOUNTING 2 – MODULE B

INTANGIBLE ASSETS

NAME ……………………………………………………..

STUDENT NUMBER ……………………………

GROUP ………………………

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LECTURE NOTES

1. Initial measurement
1.1. General
The initial recognition of an intangible asset is always at cost. Cost includes the
purchase price as well as any directly attributable costs. Directly attributable costs
are costs that were necessary to bring the asset to a condition that enables it to be
used as intended.

1.2. Goodwill
Internally generated goodwill is never recognized as an asset because the cost
cannot be measured reliably.
Purchased goodwill is recognized as an asset and the cost is recognized as follows:
purchase price paid for the entity – net asset value of entity = purchased goodwill.

1.3. Research and development

1.3.1. Research
The costs incurred during the research phase are expensed as there is no guarantee
at this stage that future economic benefits will flow to the entity.

1.3.2. Development
The costs incurred during the development phase are expensed until the following 6
criteria have all been met, as there is no guarantee at this stage that future economic
benefits will flow to the entity.

1. Technical feasibility of completing the asset

2. Intention to complete the asset and to either use or sell it
3. Ability to use or sell the asset
4. How the asset will generate future economic benefits, through, for instance,
demonstrating that there is a market to sell to, or if the asset is to be used
internally, then its usefulness
5. Adequate availability of necessary resources (technical, financial or
otherwise) to complete the development and to sell or use the asset
6. Ability to reliably measure the cost of the development of the asset

If any one of these criteria is not met, then the related costs must be expensed.

2. Subsequent measurement
1. Intangible assets are amortized as soon as they are available for use. Intangible
assets with a finite useful life are amortized in the same way as property, plant
and equipment are depreciated. Intangible assets with an indefinite useful life are
not amortized. All intangible assets must be tested for impairment regularly.

The amortization period should be the shorter of the asset’s expected economic
useful life and its legal life.

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QUESTION BANK

QUESTION 1

On 1 February 2019, Fish Ltd acquired a fishing license. The license cost R100 000.
The company had to pay R10 000 to Legal Attorneys in legal fees to assist in the
process of acquiring the license. The company paid R5 000 for a staff party to
celebrate the new fishing license once it was acquired.

Required:

1. Calculate the cost of the intangible asset for Fish Ltd.

2. Record the cost of the intangible asset in the accounting records of Fish Ltd
for the financial year ended 31 December 2019.

QUESTION 2

On 1 March 2019, Scrum Ltd acquired Tackle Ltd for R500 000. The net assets and
liabilities of Tackle Ltd were as follows:

Property, plant and equipment R600 000

Bank R100 000
Liabilities R250 000

Required:

1. Calculate the cost of the purchased goodwill for Scrum Ltd.

700 000 – 250 000 = 450 000 net assets

Goodwill = 500 000 – 450 000 = R50 000

2. Record the acquisition of Tackle Ltd in the accounting records of Scrum Ltd
for the financial year ended 31 December 2019.

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QUESTION 3

The following details relate to a research and development project of Medicine Ltd.
The company aims to develop a new cold and flu medicine.

1 Jan – 31 Jan 2019 The company spent R200 000 on market research for the new
medicine.
1 Feb – 28 Feb The company spent R300 000 on developing the new
2019 medicine. Only 4 of the 6 criteria for capitalization have been
met.
1 Mar – 31 Mar The company spent R500 000 on developing the new medicine
2019 further. Only 5 of the 6 criteria for capitalization have been met.
1 April 2019 All 6 criteria for capitalization have been met.
1 Apr – 30 Apr 2019 The company spent R700 000 on developing the new medicine
further.
1 May 2019 The formula for the new medicine is available for use.

The directors of the company have estimated the economic useful life of the formula
to be 5 years. The lawyers of the company have estimated the legal life of the
formula to be 3 years. The company amortizes intangible assets on a straight line
basis.

Required:

1. Prepare all the necessary general journal entries in the accounting records of
Medicine Ltd for the financial year ended 31 December 2023 to account for
the transactions mentioned above.
2. Prepare the intangible assets note to the statement of financial position of
Medicine Ltd at 31 December 2019.

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QUESTION 4

The following information relates to a research and development project of Auto

Accounting Ltd. The company is developing a new type of robot that will replace
accountants.

1 Jun – 30 Jun 2019 The company spent R40 000 on performing market research
on the market demand for accounting robots.
1 Jul – 31 Jul 2019 The company spent R50 000 on designing the new robot. 5 of
the 6 criteria for capitalization were met.
1 Aug – 31 Aug The company spent R60 000 on development of the robot.
2019
1 September 2019 All 6 criteria for capitalization were met.
1 Sep – 30 Sep The company spent another R100 000 on development of the
2019 robot.
1 Oct – 31 Oct 2019 The company spent another R200 000 on development of the
robot.
1 Nov 2019 Mass production of the robots started.

The company estimates the amortization period to be 5 years and the residual value
to be R50 000. The company amortizes intangible assets on a straight line basis.

Required:

1. Prepare all the necessary general journal entries in the accounting records of
Auto Accounting Ltd for the financial years ended 30 September 2019 and
2020 to account for the transactions mentioned above.
2. Prepare the intangible assets note to the statements of financial position at 31
December 2019 and 2020 of Auto Accounting Ltd.

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