Fittipaldi Company recently purchased a patent for a radar detection device for $8 million. This radar detection device has been proven to detect three times better than any existing radar detector on the market. Fittipaldi expects four years to pass before any competitor can devise a technology to beat its device. Required
a. Why does the $8 million represent an asset? Should the fixed asset department be responsible for its accounting?
b. Where would the source documents come from?
c. What happens if a competitor comes out with a new model in two years rather than four?
d. How does the auditor verify the numbers that the fixed asset department calculated at the end of the period? Is it the auditor’s responsibility to be aware of external regulatory conditions that might affect the value of the patent? For example, what if seven more states prohibit the use of radar detectors?