Question

Milano Gallery purchases the copyright on an oil painting for $390,000 on January 1, 2018. The copyright legally protects its owner for 10 more years. The company plans to market and sell prints of the original for 19 years. Prepare entries to record the purchase of the copyright on January 1, 2018, and its annual amortization on December 31, 2018.

Answer 1

Milano Gallery purchased a copyright for $390,000, which will be amortized over its legal life of 10 years. The initial purchase is recorded by debiting Copyright and crediting Cash. The annual amortization is $39,000, recorded by debiting Amortization Expense and crediting Accumulated Amortization.

Step-by-step explanation:

Amortization of Copyright

Milano Gallery has acquired the copyright for an oil painting for a total of $390,000 on January 1, 2018. Since the copyright legally protects its owner for an additional 10 years, and the company plans to use the copyright for 19 years, we must consider the legally protected period for amortization purposes.

For the journal entry on January 1, 2018:

• 
  
• Dr Copyright 390,000
• 
  
• Cr Cash 390,000

For the annual amortization on December 31, 2018, we calculate the amortization expense using the straight-line method, dividing the cost of the copyright by its legal life (10 years in this case).

Annual amortization expense = $390,000 / 10 years = $39,000

For the journal entry on December 31, 2018:

• 
  
• Dr Amortization Expense 39,000
• 
  
• Cr Accumulated Amortization - Copyright 39,000

Amortization is the process used to gradually reduce the carrying amount of a finite-lived intangible asset through periodic charges to earnings. In the case of Milano Gallery, this means recognizing a $39,000 amortization expense annually for the remaining legal life of the copyright, reflecting the consumption of the economic benefits of the copyright.

Answer 2

Purchase of copyright:

Copyright $390000

Cash/bank $390000

Amortization:

Amortization expense $20526

Copyright $20526

Step-by-step explanation:

Under IAS 38 purchased copyrights/patents and goodwill should be recorded as intangible non-current assets. The initial measurement of such intangible non-current assets should be at cost (i.e purchase price plus directly attributable costs incurred to bring the asset for it's intended use). The subsequent measurement may be either using the cost and/or revaluation basis. But IAS 38 clearly states that in order to use the revaluation model an active market should exist which is not possible for intangible assets because of their exclusivity and uniqueness therefore in most cases the subsequent measurement is also at cost.

The entries are as follows.

Purchase of copyright:

Copyright $390000

Cash/bank $390000

The copyrights have a useful life of 19 years so the amount of amortization is calculated by dividing the cost upon useful life.

Amortization amount per annum = $390000÷19

Amortization = $20526

Amortization:

Amortization expense $20526

Copyright $20526