[Oimie]

Northern Airline purchased airline gate rights at Newark International Airport for $,2,000,000 with a legal life of five years. However, Northern has the ability and right to extend the rights every ten years for an indefinite period of time. Over what period of time should Northern amortize the gate rights.

a. 5 years

b. 15 years

c. 40 years

d. The rights should not be amortized.

I picked (a) 5 years because although they had the “ability” and “right” to extend, it doesn’t say they have the “intent”. The answer it (d); explanation says “Since Northern has the ability and intent to renew the rights indefinitely, the intangible should not be amortized.” Is this an error, or are we suppose to assume they have an “intent”, because no where in the problem does it any intents. What’s the rule of thumb here?

On January 2, Year 1, Lava, Inc. purchased a patent for a new consumer product for $90,000. At the time of purchase, the patent was valid for 15 years; however, the patent’s useful life was estimated to be only 10 years due to the competitive nature of the product. On December 31, Year 4, the product was permanently withdrawn from sale under governmental order because of a potential health hazard in the product. What amount should Lava charge against income during Year 4, assuming amortization is recorded at the end of each year?

a.$9,000

b.$54,000

c.$63,000

d.$72,000

I picked (b) after amortizing it for 4 years. But the answer is (c); explanation says to amortize only 3 years. So why wasn’t the 4th year amortized? It’s already December 31st. What’s the rule of thumb here so I don’t get these types of questions wrong again?

FAR 85 June 2015
AUD 80 Nov 2015
REG 83 Nov 2015
BEC 79 Feb 2016

[mla1169]

for the 2nd question you are told that amortization is recorded at the end of each year. At the time you are making the year 4 entry only 3 years to date have been recorded, so you are recording year 4 and the balance of the patent at the same time.

FAR- 77
AUD -49, 71, 84
REG -56,75!
BEC -75

Massachusetts CPA (non reporting) since 3/12.

[Oimie]

@mla1169: So would the rule of thumb be something like this: It does not matter if an intangible asset has been used for 99.99% of a reporting period (please correct me with the right term), if amortization has not been recorded and “something” happens at the very last moment, you record that 99.99% along with whatever needs to be recorded and however it is suppose to be recorded according what happened during that 0.01%.

FAR 85 June 2015
AUD 80 Nov 2015
REG 83 Nov 2015
BEC 79 Feb 2016

[mla1169]

You're overthinking this.

At year end, so 12/31/xx the depreciation/amortization for the entire year is recorded. Some companies record it monthly, some just do one entry for the whole year.

The company in this question does one entry per year, at the end of the year, to record the amortization for the entire year. On Dec 31, xx you would make an entry for that year, or $9k.

PLUS

since there is no additional amortization to be recorded after year 4 you need to depreciate the balance (90-9-9-9-9=54k)

so your amortization for year 4 will be the year 4 amount 9k plus the $54k.

FAR- 77
AUD -49, 71, 84
REG -56,75!
BEC -75

Massachusetts CPA (non reporting) since 3/12.

[Oimie]

@mla1169: Ohhhhhh I get it, I was comprehending the problem wrong. Thanks again mla1169!

FAR 85 June 2015
AUD 80 Nov 2015
REG 83 Nov 2015
BEC 79 Feb 2016

[Author]

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