During 2014, \'Tile Oh Boys\' incurred the following expenditures: 1 Tile Oh Boy

Question

During 2014, 'Tile Oh Boys' incurred the following expenditures:

1 Tile Oh Boys purchased a controlling interest in a tile flooring company. The expenditures resulted in the recording of a material amount of 'goodwill'. The company expects to earn above average returns on this goodwill indefinately.

2 Tile Oh Boys had expenses that were made for the training of new employees. On average an employee stays with the companyfor five years before leaving. However, employees are training for a new position every 2 years.

3 Tile Oh Boys made an expenditure to purchase the patent on a popular tile cleaning machine. The patent had a remaining 'legal' life of 14 years, but the company management expects to product and sell this tile cleaning machine for only 6 more years.

4 Tile Oh Boys spent a significant amount of money to be a sponsor at the World Series of baseball. Tile Oh Boys attempt was to bring more awareness to customers of their name and product lines

5 Tile Oh Boys spent a large amount of money towards the research and development of a new industrial tile cement. The company expects that the cement will be a successful patent and that sales of the new cement product will contribute to increased revenue for at least 25 years. R&D expects the legal life of the patent to be 20 years.

REQUIRED: Explain whether each of these expenditures should be recorded as an Operating Expense or as an Intangible Asset. If the expenditure is an Intangible Asset, indicate the number of years over which the asset should be amortized, if any. Explain your reasoning.

Explanation / Answer

Transaction Type Explanation Tile Oh Boys purchased a controlling interest in a tile flooring company. The expenditures resulted in the recording of a material amount of 'goodwill'. The company expects to earn above average returns on this goodwill indefinately Goodwill is reported as an intangible in the balance sheet only when it has been acquired through business combinations (like in this case). Goodwill is not an operating expense. Additionally, it cannot be amortized. It is subject to impairment on an annual basis and its value is adjusted accordingly. Tile Oh Boys had expenses that were made for the training of new employees. On average an employee stays with the companyfor five years before leaving. However, employees are training for a new position every 2 years Operating Expense Expenses incurred on training of new employee are treated as operating expenses only. These expenditures are not required to be amortized and are expensed in the period in which they are incurred. Tile Oh Boys made an expenditure to purchase the patent on a popular tile cleaning machine. The patent had a remaining 'legal' life of 14 years, but the company management expects to product and sell this tile cleaning machine for only 6 more years. Intangible Asset Patent is treated as an intangible asset. Its cost will be allocated over its useful life or legal life life whichever is shorter. In the given case the amortization would be made for a period of 6 years. Tile Oh Boys spent a significant amount of money to be a sponsor at the World Series of baseball. Tile Oh Boys attempt was to bring more awareness to customers of their name and product lines Operating Expense Expenses incurred on advertising and promotion are treated as operating expenses only. The treatment as to operating expense or intangible asset should not be based on the value of expenditure, but should be on its nature. Tile Oh Boys spent a large amount of money towards the research and development of a new industrial tile cement. The company expects that the cement will be a successful patent and that sales of the new cement product will contribute to increased revenue for at least 25 years. R&D expects the legal life of the patent to be 20 years. Intangible Asset Research and Development is treated as an intangible asset. Its cost will be allocated over its useful life or legal life life whichever is shorter. In the given case the amortization would be made for a period of 20 years.

Related Questions

Navigate

• Browse (All)
• Browse D
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.