Question

(TCO C) What are intangible assets? How are limited-life intangibles accounted for subsequent to acquisition? On January 1, 2018, Molden Co. signed an agreement to operate as a franchisee of Mold Removal Co. for an initial franchise fee of $100,000. The agreement provides that the fee is not refundable and no future services are required of the franchisor. The agreement also provides that 5% of the Revenue from the franchise must be paid to the franchisor annually. Molden's revenue from the franchise for 2018 was $1,800,000. Molden estimates the useful life of the franchise to be 10 years. Instructions: 1. Show a schedule of what should be shown in the Intangible Assets Section of Molden's Balance Sheet at December 31, 2018. Show supporting computations in good form. 2. Show a schedule showing all the expenses resulting from these transactions that would appear on Molden's Income Statement for the year ended December 31, 2018. Show supporting computations please.

Answer 1

1. Those assets that have worth to the organization but they can not be physically touched are called 1- intangible assets. Such assets are more in papers and less in the field. Such assets can be seen in the form of

Trademarks

Goodwill

Patents

Franchise rights

All the above does not have a tangible existence but they have a value to the business that will be shown in the balance sheet of the company althought they can not be touched physically.

1. When these intangible assets are acquired then they are amortized over the period of their useful life like other fixed assets.

But these intangible assets are amortized and not depreciated.

1. Since the rights of the franchise is purchased for 10 years then the acquisition cost will be amortized over the period of 10 years.

Every year we will amortize 10k calculated as below.

100K/10(cost divided by the useful life)

JE required.

Amortization expenses 10k

To Franchise cost                    10K

1. Now to remain in business it is required that some fee is paid to the franchisor and this fees is often on the sales or on the net profit or can be a flat dollar rate.

In this case this fees is on the sales hence this fees will be considered as the royalty that the firm will pay and this 5% of sales will be directly recognized as an expenses for the year.

Royalty 9000

To Franchisor9000

1800000*5%