Chapter 12, Problem 10P

1.

To determine

Prepare the intangible assets section of the balance sheet of Company T at December 31, 2016.

Explanation of Solution

Intangible assets: These are the long-term assets which are not physical in nature, but possess value. The intangible assets would be amortized over their definite useful life or limited useful life, and those with indefinite or unlimited lives are not amortized.

Prepare the intangible assets section of the balance sheet of Company T at December 31, 2016 as follows:

Company T
Intangible assets section of balance sheet
For the year ended December 31, 2016
Particulars	Amount
Franchise from Company R, net (Schedule 1)	$61,830
Patent, net (Schedule 2)	$14,35
Trademark, net (Schedule 3)	$42,706
Total intangible assets	$118,886

Table (1)

Schedule 1:

Calculate the value of franchise from Company R.

Particulars	Amount
Cost of franchise at January 1, 2016:
Down payment	$25,000
Present value of installments	$43,700
Initial amount capitalized	$68,700
Less: Amortization of franchise for 2016 (1)	$6,870
Franchise balance on December 31, 2016	$61,830

Table (2)

Schedule 2:

Calculate the value of patent.

Particulars	Amount
Capitalized cost of patent at January 2, 2016-Legal fees and other cost associated with registration	$16,400
Less: Amortization of patent for 2016 (2)	$2,050
Patent balance on December 31, 2016	$14,350

Table (3)

Schedule 3:

Calculate the value of patent.

Particulars	Amount
Cost of trademark at July1, 2016	$40,000
Less: Amortization expense from July 1, 2013 to December 31, 2015 (3)	$5,000
Less: Amortization expense from January 1,2016 to June 30, 2016 (4)	$1,000
Add: Cost of successful litigation	$10,000
Balance on July 1, 2016	44,000
Less: Amortization expense from July 1, 2016 to December 31, 2016 (5)	$1,294
Trademark balance on December 31, 2016	$42,706

Table (4)

Note: Trademark has a limited useful life; hence it should be amortized over its useful life.

Working note (1):

Calculate the amortization of franchise for 2016.

$\begin{array}{c}\text{Amortization expense = }\frac{\text{Initial amount capitalized}}{\text{Economic useful life}}\\ =\frac{\$68,700}{\text{10 years}}\\ =\$6,870\end{array}$

Working note (2):

Calculate the amortization of patent for 2016.

$\begin{array}{c}\text{Amortization expense = }\frac{\left(\text{Capitalized cost of patent}\right)}{\text{Useful life}}\\ =\frac{\$16,400}{\text{8 years}}\\ =\$2,050\end{array}$

Working note (3):

Calculate the amortization expense of trademark from July 1, 2013 to December 31, 2016.

$\begin{array}{c}\text{Amortization expense = }\left[\begin{array}{l}\left(\frac{\text{Purchased price of trademark}}{\text{Useful life}}\right)\times \\ \text{Number of years from July 1, 2013 to December 31, 2016}\end{array}\right]\\ =\frac{\$40,000}{\text{20 years}}\times 2.5\text{ years}\\ =\$5,000\end{array}$

Working note (4):

Calculate the amortization expense of trademark from January 1, 2016 to June 30, 2016.

$\begin{array}{c}\text{Amortization expense = }\left[\begin{array}{l}\left(\frac{\text{Purchased price of trademark}}{\text{Useful life}}\right)\times \\ \text{Number of years from January 1,2016 to June 30, 2016}\end{array}\right]\\ =\frac{\$40,000}{\text{20 years}}\times 0.5\text{ years}\\ =\$1,000\end{array}$

Working note (5):

Calculate the amortization expense of trademark from July 1, 2016 to December 31, 2016.

$\begin{array}{c}\text{Amortization expense = }\left[\begin{array}{l}\left(\frac{\text{Trademark balance on July 1, 2016}}{\left(\begin{array}{l}\text{Useful life}-\\ \text{Number of years from 2013 to 2016}\end{array}\right)}\right)\times \\ \text{Number of years from July 1,2016 to December 31, 2016}\end{array}\right]\\ =\frac{\$44,000}{\left(\text{20 years}-\text{3 years}\right)}\times 0.5\text{ years}\\ =\$1,294\end{array}$

2.

To determine

Prepare a schedule showing all expenses of intangible assets that would appear on the income statement of Company T for the year ended December 31, 2016.

Explanation of Solution

Prepare a schedule showing all expenses of intangible assets that would appear on the income statement of Company T for the year ended December 31, 2016 as follows:

Company T
Expenses resulting from intangibles transactions
For the year ended December 31, 2016
Particulars	Amount	Amount
Franchise from Company R:
Amortization of franchise for 2016 (Schedule 1)	$6,870
Add: Franchise fees on revenues from operations (6)	$45,000
Add: Imputed interest expense on unpaid balance of initial franchise fees (7)	$6,118	$57,988
Patent:
Amortization of patent for 2016 (Schedule 2)		$2,050
Trademark:
Amortization of trademark for 2016 (Schedule 3) (8)		$2,294
Total intangible assets		$62,332

Table (5)

Working note (6):

Calculate the franchise fees on revenues from operations.

$\begin{array}{c}\text{Franchise fees on revenue = Value of franchise}\times \text{5\% revenue}\\ =\$900,000\times \frac{5}{100}\\ =\$45,000\end{array}$

Working note (7):

Calculate the imputed interest expense.

$\begin{array}{c}\text{Imputed interest expense = Present value at January 2, 2016}\times \text{Interest rate}\\ \text{=\$43,700}\times \frac{14}{100}\\ =\$6,118\end{array}$

Working note (8):

Calculate the amortization expense of trademark for 2016.

$\begin{array}{c}\text{Amortization expense for 2019 = }\left(\begin{array}{l}\left(\begin{array}{l}\text{Amortization expense }\\ \text{from}\text{January 1, 2016 to June 30, 2016}\end{array}\right)-\\ \left(\begin{array}{l}\text{Amortization expense }\\ \text{from}\text{July 1, 2016 to December 31, 2016}\end{array}\right)\end{array}\right)\\ =\$1,000(4)+\$1,294(5)\\ =\$2,294\end{array}$