Intangible Asset Amortization Calculation

This assignment focuses on calculating the amortization expense for an intangible asset. It outlines the different components of the cost of an intangible asset, such as research, prototype, and legal costs, totaling ₹9,00,000. The assignment then demonstrates how to amortize this asset over a period of 4 years, resulting in an annual amortization expense of ₹2,25,000. The calculations are presented with journal entries for both the amortization expense recognition and the transfer to the Profit & Loss account.

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FINANCIAL ACCOUNTING

Financial accounting
Scenario – 1
Part -a
Date Particulars Amount($) Amount($)
20.10.2018 Redeemable Preference Share Capital A/c Dr. 1,20,000
Premium on Redemption of Preference Shares Dr. 6,000
Preference Shareholders A/c Cr. 1,26,000
(Redemption amount of preference shares
payable to preference shareholders)
20.10.2018 Retained Earnings A/c Dr. 1,26,000
Capital Redemption Reserve A/c Cr. 1,26,000
(Provision made for redemption from retained
earnings)
25.10.2018 Preference Shareholders A/c Dr. 1,26,000
Bank A/c Cr. 1,26,000
30.11.2018 Cash A/c Dr. 1,94,560
Receivable- Underwriter Dr. 48,640
Share Capital-Ordinary Class 1 Cr. 2,43,200
(Issue of 51200 right shares @ 3.80 $ each and
the balance shares underwritten by Underwriter)
Note : 1 for 5 shares were to be issued .
hence no of shares issued = 320000*1/5=
64000
shares availed= 256000*1/5= 51200 shares
only
20.12.2018 Receivable -undewriter Dr. 4,800
Cash Cr. 4,800
(Underwriting Costs paid)
10.01.2019 Retained Earnings Dr. 56,000
General Reserve A/c Cr.
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Financial accounting
56,000
(amount transferred from retained earnings to
General Reserve A/c)
28.02.2019 Cash A/c Dr. 2,01,600
Share Capital- Ordinary Class 3 Cr. 2,01,600
(56000 shares issued against the options
exercised- @ 3.60 $ per share)
31.05.2019 Bank A/c (228000 shares @ $ 1.60) Dr 3,64,800
Calls in Arrear (12000 shares @ $1.60) Dr 19,200
Share Allotment A/c Cr 3,84,000
(allotment money received except for 12000 shares)
18.06.2019 Share Capital A/c (12000 shares @ $4) Dr 48,000
Final Call on Shares (12000 shares @ $ 1.6) Cr 19,200
Share Forfeiture A/c (12000 shares @ $ 2.4) Cr 28,800
(being 12000 shares forfeited for non payment
of final call)
26.06.2019 Cash A/c (12000 * 3.60 $) Dr. 43,200
Share Forfeiture A/c (12000* $ 0.40) Dr. 4,800
Share Capital A/c Cr. 48,000
(Re-issue of forfeited shares )
26.06.2019 Share Forfeiture A/c Dr. 24,000
Payable to Shareholders of forfeited shares Cr 24,000
(balance remaining in share forfeiture a/c to
be paid to former holders of forfeited shares)
($ 28800- $ 4800)
27.06.2019 Payable to Shareholders of forfeited shares Dr 24,000
Bank/ Cash A/c Cr 24,000
(amount paid)
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Financial accounting
Part – b
Equity section of ChiHerbal's statement of Financial Position as at 30th june 2019
Particulars
Amount
($)
Ordinary Class 1 Shares
320000 shares @ $ 4 fully paid 12,80,000
51200 shares @ 3.80 $ fully paid 1,94,560 14,74,560
Ordinary Class 2 Shares
228000 shares @ $ 4 fully paid 9,12,000
Ordinary Class 3 Shares
12000 shares @ $ 4 fully paid 48,000
Retained Earnings 4,52,800
General Reserve 56,000
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Financial accounting
Scenario – 2
Part -a
Journal Entries for Revaluation of Assets :
The values of assets as at 30th June 2018 are given. Also the balances on this date for Revaluation
Surplus A/c are given .
Date Particulars Amount($) Amount($)
30.06.2018 Residential Land A/c Dr. 1,60,000
Revaluation Surplus A/c Cr. 1,60,000
(being land value increased due to revaluation
and the increment of value credited to
revaluation surplus a/c )
30.06.2018 Revaluation Surplus A/c Dr. 3,20,000
Factory Land A/c Cr. 3,20,000
(being land value decreased due to revaluation
and the downfall in value debited to
revaluation surplus a/c )
30.06.2018 Building A/c Dr. 3,20,000
Revaluation Surplus A/c Cr. 3,20,000
(being building value increased due to revaluation
and the increment of value credited to
revaluation surplus a/c )
Calculation of Carrying Amount of Building
Building at valuation 2014 12,80,000
Less : Accumulated Depreciation 1,60,000
Carrying Amount of Building 11,20,000
New Fair Value 14,40,000
Transfer to Revaluation Surplus 3,20,000
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Financial accounting
Part -b
Date Particulars Amount($) Amount($)
01.07.2017 Truck A/c Dr. 57,142
Revaluation Surplus A/c Cr. 57,142
(Difference between the Carrying Amount of
Truck and Fair Value transferred to respective
accounts)
01.07.2018 Disposal of Assets A/c Dr. 3,33,333
Truck A/c Cr. 3,33,333
(carrying value of truck transferred to disposal
account)
01.07.2018 Bank A/c or Cash A/c Dr. 2,20,000
Disposal of Assets A/c Cr. 2,20,000
(amount received transferred to disposal a/c)
01.07.2018 Income Statement Dr. 1,13,333
Disposal of Assets A/c Cr. 1,13,333
(loss arising due to difference in carrying value
and sales proceeds transferred to Income
statement)
01.07.2018 Revaluation Surplus A/c Dr. 57,142
Retained Earnings Cr. 57,142
(balance of revalued surplus transferred to
Retained Earnings)
Working Notes :
Note -1
Purchase Value of Truck as on 01st July 2015 $ 4,80,000
Depreciation using Straight Line Method
(Value of truck- estimated residual value)
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Financial accounting
Expected Life Years
($ 480000- Nil)/ 7 $ 68,571
Depreciation for 2nd year $ 68,571
Carrying Amount of Truck as on 1st July 2017 $ 3,42,858
Note -2
New Fair Value of Truck as on 1st July 2017 $ 4,00,000
Depreciation using Straight Line Method
(Value of truck- estimated residual value)
Expected Life Years
($ 400000- Nil)/ 6 $ 66,667
Carrying Amount of Truck as on 1st July 2018 $ 3,33,333
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Financial accounting
Scenario 3 – Leases
As nothing is specified in the question we are assuming the lease to be finance lease.
Also, the lease term is equal to the useful life, it can be considered as financial lease
Journal entries in books of lessor Easy Rental Ltd.
Date Particulars Amount($) Amount($)
01.07.201
8 Lease Receivable
Dr
. 1,04,526
Motor Vehicle
Cr
. 1,04,526
(Present Value of Lease Rentals of Six Years
-Working Note-1)
Year 2019 Cash
Dr
. 24,000
Lease Receivable ($ 24000- $ 2400)
Cr
. 21,600
Finance Income ($ 24000 *10%)
Cr
. 2,400
(Instalment received for 1st year)
**Finance Income is 10% of the yearly lease rent
Year 2020 Cash
Dr
. 24,000
Lease Receivable ($ 24000- $ 2160)
Cr
. 21,840
Finance Income ($ 21600 *10%)
Cr
. 2,160
(Instalment received for 2nd year)
** Finance Income will now be calculated on reduced
Lease Receivable
Working Note -1
Present Value of Lease Rentals of 6 years:
Yea
r Lease Rentals PV factor
@ 10%
1 24,000 0.909 21,818
2 24,000 0.826 19,835
3 24,000 0.751
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Financial accounting
18,032
4 24,000 0.683 16,392
5 24,000 0.621 14,902
6 24,000 0.564 13,547
Present Value 1,04,526
There is zero unguaranteed residual value.
Journal entries in books of lessee ChiHerbal Ltd.
In case of finance lease, the lessee records both asset and liablity at the inception of lease tenure
of an amount equal to present value of lease rentals
Date Particulars Amount($) Amount($)
01.07.201
8 Lease Asset Dr. 1,04,526
Lease Liability Cr. 1,04,526
(Present Value of Lease Rentals of Six Years
-Working Note-1)
Year 2019 Lease Liability ($ 24000- $ 2400) Dr. 21,600
Interest Expense ($ 24000 *10%) Dr. 2,400
Cash Cr. 24,000
(Instalment paid for 1st year)
**Interest Expense is 10% of the yearly lease rent
Year 2020 Lease Liability ($ 24000- $ 2160) Dr. 21,840
Interest Expense ($ 21600 *10%) Dr. 2,160
Cash Cr. 24,000
(Instalment paid for 2nd year)
** Interest expense will now be calculated on reduced
Lease Liability
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Financial accounting
Entry of Depreciation is also done in books of lessee. The rate is not given
Entry is: Depreciation A/c Dr.
Lease Asset A/c Cr.
Scenario 4 – Intangible Assets
As per AASB 138, an intangible asset must be measured at cost which includes purchase price and all
the directly attributable costs for preparing of the assets for its
use.
in the given question, the asset is an internally generated intangible asset which is developed in '
2 phases- the research phase and the development phase
Journal Entries
Date Particulars Amount($) Amount($)
For Expense on Product Research
Product Development Cost
Dr
. 3,50,000
Bank A/c
Cr
. 3,50,000
(The cost has been capitalised as it is assumed to
create future economic benefits)
For Expense on Prototype development
Prototype Development Cost
Dr
. 5,28,000
Bank A/c
Cr
. 5,28,000
(The cost has been capitalised as it is assumed to
create future economic benefits)
For Expense on Legal Cost of Patent
Patent Cost
Dr
. 22,000
Bank A/c
Cr
. 22,000
(The cost has been capitalised as it is assumed to
create future economic benefits and it has a
long
life of 4 years)
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Financial accounting
For Expense on Marketing Campaign
Cost on Marketing Cost
Dr
. 6,50,000
Bank A/c
Cr
. 6,50,000
(This cost shall be treated as a revenue
expenditure
as marketing shall continue even after the
product
has started genearted revenues)
For Recognition of Sales Revenue at present value
Amount Receivable
Dr
. 150,00,000
Sales A/c
Cr
. 150,00,000
(being amount of sales booked at present value)
Total Cost of Intangible asset
Research Cost 3,50,000.00
Protype Cost 5,28,000.00
Legal Cost 22,000.00
Total Cost of Intangible Asset 9,00,000.00
For Amortization Expenses
Amortization expenses
Dr
. 2,25,000
Intangible Asset
Cr
. 2,25,000
( Being Asset amortized over period of 4 years i.e 900000/4)
For transfer to Profit & Loss A/c.
Profit & Loss A/c
Dr
. 2,25,000
To Amortization Expense
Cr
. 2,25,000
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Financial accounting
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Financial accounting
Bibliography
Bodie, Z., Kane, A. and Marcus, A. J. (2014) Investments. McGraw Hill
Brigham, E. and Daves, P. (2012) Intermediate Financial Management. USA: Cengage
Learning.
Davies, T. and Crawford, I. (2012) Financial accounting. Harlow, England: Pearson.
Parrino, R, Kidwell, D. and Bates, T. (2012) Fundamentals of corporate finance. Hoboken,
NJ: Wiley
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