Chapter 9, Problem 9.5AP

(a)

To determine

Intangible Assets: These are the long-term assets having no physical existence. However, the benefits provided by these assets are used by the company for a long period of time. Example: Patent, Trademark, Goodwill, Copyrights.

Amortization: Itis the process of allocating the value of the intangible assets over its estimated useful life.

To Record: the journal entries for the accounts related to intangible assets.

Explanation of Solution

Record the journal entries for the accounts related to intangible assets.

Date		Account Titles and Description	Post Ref.	Debit ($)	Credit ($)
2018
January	2	Patents		46,800
		Cash			46,800
		(To record the legal costs for the purchase of patent)
January-June		Research and Development Costs		230,000
		Cash			230,000
		(To record the payment made for research and development )
July	1	Patents		20,000
		Cash			20,000
		(To record the legal costs for the purchase of patent)
September	1	Advertising Expense		40,000
		Cash			40,000
		(To record payment of advertising expense)
October	1	Copyright		200,000
		Cash			200,000
		(To record acquisition of copyright)

Table (1)

Description:

January 1: Payment of legal costs for the purchase of patent.

• Patents are intangible assets and is increased by $46,800. Therefore, debit the patents account with $46,800.
• Cash is an asset and is decreased by $46,800. Therefore, credit the cash account with $46,800.

January-June: Payment of Research and Development costs

• Research and Development costs are expenditures and is increased by $230,000. Therefore, debit the research and development cost account with $230,000.
• Cash is an asset and is decreased by $230,000. Therefore, credit the cash account with $230,000.

July 1: Payment of legal and other costs for the purchase of patent.

• Patents are intangible assets and is increased by $20,000. Therefore, debit the patents account with $20,000.
• Cash is an asset and is decreased by $20,000. Therefore, credit the cash account with $20,000.

September 1: Payment of Advertising expense

• Advertising expense are expenses and is increased that decreases the stockholders’ equity by $40,000. Therefore, debit the research and development cost account with $40,000.
• Cash is an asset and is decreased by $40,000. Therefore, credit the cash account with $40,000.

October 1: Acquisition of copyright for cash.

• Copyrights are intangible assets and is increased by $200,000. Therefore, debit the copyrights account with $200,000.
• Cash is an asset and is decreased by $200,000. Therefore, credit the cash account with $200,000.

(b)

To determine

To prepare: the journal entries to record the 2018 amortization expense for intangible assets.

Explanation of Solution

Prepare the journal entries to record the 2018 amortization expense for intangible assets.

Date		Account Titles and Description	Post Ref.	Debit ($)	Credit ($)
2018
December	31	Amortization Expense                (1)		11,700
		Patents			11,700
		(To record the amortization expense for patents )
December	31	Amortization Expense                (2)		4,600
		Copyrights			4,600
		(To record the amortization expense for copyrights )

Table (2)

Working notes:

Calculate amortization expense for patents.

Patents cost on 31^stDecember, 2017=$60,000

Useful life = 20 years.

Legal cost paid for patents on January 2, 2018 = $46,800.

Number of months used = July 1, 2018-December 31, 2108

$\begin{array}{c}\begin{array}{l}\text{Amortization }\\ \text{expense}\end{array}\}=\left[\begin{array}{l}\left[\frac{\text{Acquisition cost}}{\text{Total useful life}}\right]+\left[\frac{\text{Legal expenses for patents on January 2}}{\text{Remaining useful life}}\right]+\\ \left[\frac{\text{Legal expenses for patents on July 1}}{\text{Remaining useful life}}\text{×Time period}\right]\end{array}\right]\\ =\left[\left(\frac{\$60,000}{\text{10 years}}\right)+\left(\frac{\$46,800}{\text{9 years}}\right)+\left(\frac{\$20,000}{\text{20 years}}\times \frac{6}{12}\right)\right]\\ =\$6,000+\$5,200+\$500\\ =\$11,700\end{array}$ (1)

Calculate the amortization expense for copyrights.

Cost of copyrights on 31^stDecember, 2017= $36,000

Useful life = 10 years

Acquisition cost on October 1, 2018 = $200,000.

Number of months used = October 1, 2018-December 31, 2108

$\begin{array}{c}\text{Amortization expense}=\left[\begin{array}{l}\left[\text{ Cost of copyright}\times \frac{1\text{ Year}}{\text{Total useful life}}\right]\\ +\left[\begin{array}{l}\text{Acquisition cost}\times \\ \frac{1\text{ Year}}{\text{Remaining useful life}}\times \frac{3}{12}\end{array}\right]\end{array}\right]\\ =\left[\$36,000\times \frac{1}{10}\right]+\left[\$200,000\times \frac{1}{50}\times \frac{3}{12}\right]\\ =\$4,600\end{array}$ (2)

(c)

To determine

To Prepare: the intangible assets section of the balance sheet at December 31, 2018.

Explanation of Solution

Prepare the intangible assets section of the balance sheet at December 31, 2018.

A Corporation
Balance Sheet (Partial)
December 31, 2018
Particulars	Amount ($)	Amount ($)
Intangible Assets
Patents $\left(\$60,000+\$46,800+\$20,000\right)$	126,800
Less: Amortization $\left(\$6,000+\$11,700\right)$	17,700	109,100
Copyrights $\left(\$36,000+\$200,000\right)$	236,000
Less: Amortization $\left(\$25,200+\$4,600\right)$	29,800	206,200
Total intangible assets		315,300

Table (3)

(d)

To determine

To Prepare: the note to financial statements on A Corporation’s intangible assets as of December 31, 2018.

Explanation of Solution

A Corporation’s intangible assets have two patents and two copyrights. One patent is worth $60,000 that is amortized over 10 years. In addition to this legal costs of $46,800 was incurred to defend this patent, and thus is amortized over the remaining useful life of 9 years. Another patent was acquired worth $20,000 that is, amortized over 20 years. Two copyrights worth $36,000 and $200,000 were amortized over 10 years and 50 years respectively.