How to Amortize Intangible Assets - YouTube

Let's talk about amortizing intangible assets.

So first, what is amortization? So it's  the allocation of the cost of an asset  

over it's useful life. You can almost  think of it as depreciating an intangible  

asset. Some intangible assets will be amortized,  others won't. And the way we decide which ones are  

and which ones aren't depends on their life.  So if an intangible asset has a limited life,  

it will be amortized. So that means if a patent  is good for 20 years, that patent will then need  

to be amortized. If an intangible asset has  an unlimited life, it will not be amortized.  

So if there is no end date to that intangible  asset, we will not amortize that asset.  

Then, our journal entry to record amortization.  We're going to see this in action in our example  

problem here in a bit. What we do is we debit  the amortization expense, and we will credit  

the intangible asset being amortized. For  example, the patent would be credited. So what  

we're doing is we are increasing the expense  and we are decreasing that intangible asset.

Now let's talk about our example problem.  We're told Lewis Company have the following  

intangible assets on December 31, 2021.  They had patents, goodwill, franchises  

and trademarks. The patent was purchased on  January 1st of this year, and has a 10-year life.  

The franchise was purchased on July 1st  of 2021, and has a 12-year life. So,  

right off the bat, we see the  patent and the franchise both have  

limited life, which tells us that those are the  two intangible assets that we need to amortize.  

Because the goodwill and the trademarks have  an unlimited life. So we can just kind of  

forget about those two here when we're  just talking about the amortization.  

Now, we need to prepare the adjusting entry on  December 31st to record our amortization expense.

Let's break it up between the patent and the  franchise here. So first, the patent amortization.  

Well, you can find the annual amortization  expense by taking the total cost of the patent  

and dividing it by its useful life. Our  total cost was $450,000. We divide that  

by the 10-year life that we were told. And our  annual amortization expense will be $45,000.

Now for the franchise. We take the total  cost of the franchise, and divide it by its  

useful life. So, the franchise cost $600,000. We  divide it by its 12 years of life. And we get an  

annual amortization expense for the  franchise of $50,000. Now there's one  

more step we need to take into account here.  The patent, that was purchased on January 1st  

and now it's the end of the year. So we had it for  all of 2021. The franchise was purchased mid-year.  

It was purchased on July 1st, so we've had it for  6 months. So, our amortization expense for 2021,  

we take the annual number that we found, the  50,000. We multiply it by 6 over 12, because  

we've had it for 6 months. And that tells us the  amortization expense for the franchise is 25,000.

Now for the adjusting entry. We talked about the  framework of the entry a little bit ago, right?  

It's the debit to the amortization expense  and the credit to our intangible assets.  

And notice, we can amortize multiple intangible  assets in one entry. We don't need to make a  

separate one for the patent, and then another  one for the franchise. It can all just go  

into one journal entry. So the patents and  the franchises get credited by the amounts  

that we found earlier, the 45,000 and the  25,000. So, we toss those into the entry.  

Your amortization expense is just those  two numbers added up, right? Because debits  

have to equal credits. So 45,000 plus 25,000  gives us the amortization expense of $70,000.