Creative Solutions purchased a patent from Russell Lazarus, an inventor. At the time of the purchase, the patent had two years remaining. The president of Creative Solutions decided to have the accountant amortize the cost of the patent, $200,000, over 10 years rather than two years. His reasoning was that the $200,000 has already been spent and stockholders might ask a lot of questions about a $100,000 expense showing up on the income statement but probably wouldn’t pay much attention to a $20,000 expense.

1. What is Creative Solutions’ ethical responsibility to the company’s stockholders?

2. According to GAAP, how should the amortization of patents be treated?

3. Write a short paragraph explaining similarities and differences between plant assets and intangible assets.

4. In groups of two or three, determine an appropriate method of depreciation, depletion, or amortization of the following assets for financial reporting purposes:

(a) A car used as a taxi,

(b) A parcel of land that will be resold in a few years,

(c) A computer that has a very short life and loses most of its value in the first year or two,

(d) An ore mine,

(e) Research and development costs incurred to develop a trademark.