Clare Cherry Cola (CCC) is a privately held soda company specializing in the manufacturing and distribution of

Question:

Clare Cherry Cola (CCC) is a privately held soda company specializing in the manufacturing and distribution of soda across Canada. CCC is a fairly new entrant to the market, incorporated in 2008, but it has been doing well in the last few years, expanding to new markets across Canada and showing strong growth in current markets.
For the current fiscal year of 2013, the company decided to hire a Big Four accounting firm to review its financial statements. While doing preliminary audit work, the auditors were looking for more information concerning several intangible accounts and were informed of the following:
Note 1: Brand name is an intangible asset on the balance sheet for $300,000. The cost was related to legal and other trademark fees of the brand name and logo. The company claimed an indefinite useful life on the asset and therefore no amortization has been recorded so far.
Note 2: In 2013, the company decided to create a sophisticated client list with detailed information reported on each client. The company capitalized the client list as an intangible asset because there were future benefits associated with the asset. The list was valued at $50,000 and no amortization has been recorded so far.
Note 3: The company was also heavily involved in the research and development of new soda flavours. In 2013, the company capitalized $150,000 in research costs and $200,000 in product development costs.
Note 4: At the end of 2013, the company was granted a patent on the new soda flavour “strawberry-kiwi” that it had developed. The patent was valued at $50,000 and was amortized over 10 years, the legal life of the patent.
Note 5: The company also had internally generated goodwill valued at $100,000 on the balance sheet. The amount of goodwill was determined based on the company’s excellent customer service, social responsibility, and increasing market share.

Required:
a. Suppose you are the auditor for CCC. Comment on CCC’s accounting policies for the following intangible assets:
i. Brand name
ii. Client list
iii. Research and development costs
iv. Patent
v. Goodwill
b. Discuss the earnings management potential with regard to intangible assets.
c. Do you believe that companies should capitalize intangible assets? Explain your position.

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