Question

Remaining Life Taylor Lewis Company has provided information on intangible assets as follows: a. During 2015, a patent was purchased from Craig Company for $4,000,000 on June 1, 2015. Lewis estimated the remaining useful life of the patent to be eight years. The patent was carried in Craig’s accounting records at a net book value of $3,500,000 when Craig sold it to Lewis. On January 1, 2016, because of recent events in the field, Lewis estimates that the remaining life of the patent purchased on June 1, 2015, is only five years from January 1, 2016. b. During 2016, a franchise was purchased from Faragher Company for $360,000. Lewis estimates the useful life of the franchise to be 12 years and takes a full year’s amortization in the year of purchase. In addition, 8% of revenue from the franchise must be paid to Faragher each year. Revenue from the franchise for 2016 was $1,950,000. c. Lewis incurred research and development costs in 2016 as follows: Materials and equipment $286,500 Personnel $153,700 Indirect costs $95,355 Total $535,555 Lewis estimates that these costs will be recouped by December 31, 2019. The materials and equipment purchases have no alternative uses. Required: 1. Prepare a partial balance sheet showing the intangible section only of Lewis’s balance sheet as of December 31, 2016. Show supporting computations in good form. 2. Prepare a partial income statement showing the income statement effect for the year ended December 31, 2016, as a result of the facts above. Show supporting computations in good form. Write a paper and format it according to the CSU-Global Guide to Writing and APA Requirements. The paper must show all calculations used to arrive at the answers. Insert any Excel spreadsheets into the Word document and submit only the Word document.

Answer 1

(a) Accounting for patent: Value of patent has taken on the purchase price of patent. The value of patent has amortized in legal life or useful life whichever is shorter. Amortization has done on the method of Straight-line.

Purchased date of patent = June 1, 2015

Purchased price = $ 400,000

Useful life of patent = 8 years

Amortization amount as on Dec. 31, 2015 = 400,000/8 x 6/12 = $ 25,000

Book value of patent as on Dec. 31,2015 = 400,000 - 25,000 = $ 375,000

Due to impairment, remainning life of the asset has only 5 years.Then, amortization rate change in remainning life of the patent.

Amortized value of patent as on Dec. 31,2016 = 375,000/5 = $ 75,000

Book value of patent as on Dec. 31,2016 = 375,000 - 75,000 = $ 300,000

Hence, the amortized value of patent $ 75,000 has shown in income statement and book value of patent $ 300,000 has shown in balance sheet at December 31, 2016.

(b) Accounting for Franchise: The cost of franchise has the purchase price and any percentage of revenue as per contract.The cost of franchise has amortized of its legal life and useful life whichever has shorter.Amortization rate has calculated by straight line method.

Purchase cost of Franchise = Purchase cost + 9% of revenue = 360,000 + (1,950,000 x 9 %) = 360,000 + 175,500 = $ 535,500

Amortization for the year 2016 = 535,500/12 = $ 44,625

Book value of Franchise as on December 31,2016 = 535,500 - 44,625 = $ 490,875

Hence, the amortized value of Franchise $ 44,625 has shown in income statement and book value of franchise $490,875 has shown in balance sheet at December 31, 2016.

(c) Accounting for Research and Development : Research and Development cost generally include Cost of material and equipment, Cost of personnel and indirect cost etc.If cost of equipment has no other use.It is totally expensed off with other cost. If Research and development cost has probable economic feaseable life.Then, it is capitalised and amortized during useful life, otherwise, expense-off in the year of its occured.

Useful life of Research and Development cost = 4 years

Total cost = $ 535,555

Amorization for the year 2016 = 535,555 / 4 = $ 133,889

Book value as on December 2016 = 535,555 - 133,889 = $ 401,666

(1) Preparation of schedule showing the intangible section of Lewis’s balance sheet at December 31, 2016.We have,

Intangilbe Asset	Amount ($)
Patent Cost	300,000
Franchise Cost	490,875
Reaserch and Development Cost	401,666
Total Intangible Asset as on December, 2016	1,192,541

(2) Preparation of a schedule showing the income statement effect for the year ended December 31, 2016.We have,

Intangilbe Asset	Amount ($)
Patent Cost	75,000
Franchise Cost	44,625
Reaserch and Development Cost	133,889
Total Intangible Asset expense-off as on December, 2016	253,514