Question

Crane Company has provided information on intangible assets as follows.

A patent was purchased from Ford Company for $2,559,000 on January 1, 2016. Crane estimated the remaining useful life of the patent to be 10 years. The patent was carried in Ford’s accounting records at a net book value of $1,822,000 when Ford sold it to Crane.

During 2017, a franchise was purchased from Polo Company for $545,000. In addition, 4% of revenue from the franchise must be paid to Polo. Revenue from the franchise for 2017 was $2,505,000. Crane estimates the useful life of the franchise to be 10 years and takes a full year’s amortization in the year of purchase.

Crane incurred research and development costs in 2017 as follows.

Materials and equipment		$144,200
Personnel		185,200
Indirect costs		103,500
		$432,900

Crane estimates that these costs will be recouped by December 31, 2020. The materials and equipment purchased have no alternative uses.

On January 1, 2017, because of recent events in the field, Crane estimates that the remaining life of the patent purchased on January 1, 2016, is only 5 years from January 1, 2017

Prepare the income statement effect (related to expenses) for the year ended December 31, 2017, as a result of the facts above

Answer 1

Prepare the intangibles section of Carters balance sheet at December 31, 2017.

So, for the patent purchased from Gerald Ford on January 1, 2016 for $2559000 with a remaining useful life at that time of 10 years, this patent would have been amortized during calendar year 2017 in the amount of $2559000/ 10 = $255900.

As of January 1, 2017, Carter Company estimates the useful life is only 5 years from January 1, 2014. The net book value of the patent as of January 1, 2017 is $2559000 - $255900 = $2303100. Therefore, the amortization expense for the patent during calendar year 2017 would be $2303100 / 5 years = $460620. Therefore, at the end of 2014, the cost of this patent is $2559000 and the accumulated amortization is $255900 + $460620 = $716520.

With regards to the franchise, Carter paid $545000 during 2017 for the franchise and the estimated useful is 10 years, and a full year of amortization is taken in the year of purchase. Therefore, the amortization expense for this franchise during calendar year 2017 is $545000 / 10 = $54500. Therefore, the accumulated amortization for this franchise intangible asset is $54500 at the end of 2017.

Jimmy Carter Company

Intangibles Section-Balance Sheet

December 31, 2017

Patent, at cost $2559000

Less: Accumulated amortization $716520

Net Patent $1842480

Franchise, at cost $545000

Less: Accumulated amortization $54500

Net Franchise $490500

Prepare the income statement effect (related to expenses) for the year ended December 31, 2017, as a result of the facts above.

Amortization expense for the patent (see a) above) $460620

Amortization expense for the franchise (see a) above) $54500

Franchise fee expense ($2505000 of revenue * 4%) = $100200

Research and development expenses: Carter incurred research and development costs in 2017 as follows, as of which must be expensed immediately totaling $432900 as follows: Materials and Equipment 144200 + Personnel 185200 + Indirect Costs 103500.