In: Accounting
Presented below is selected information for Sandhill
Company.
Answer the questions asked about each of the factual
situations.
1. Sandhill purchased a patent from Vania Co. for
$1,300,000 on January 1, 2015. The patent is being amortized over
its remaining legal life of 10 years, expiring on January 1, 2025.
During 2017, Sandhill determined that the economic benefits of the
patent would not last longer than 6 years from the date of
acquisition. What amount should be reported in the balance sheet
for the patent, net of accumulated amortization, at December 31,
2017?
The amount to be reported |
$ |
|
2. Sandhill bought a franchise from Alexander Co. on January 1, 2016, for $400,000. The carrying amount of the franchise on Alexander’s books on January 1, 2016, was $550,000. The franchise agreement had an estimated useful life of 30 years. Because Sandhill must enter a competitive bidding at the end of 2018, it is unlikely that the franchise will be retained beyond 2025. What amount should be amortized for the year ended December 31, 2017?
the amount to be amortized |
$ |
3. On January 1, 2017, Sandhill incurred organization costs of $300,000. What amount of organization expense should be reported in 2017?
The amount to be reported |
$ |
4. Sandhill purchased the license for distribution of a popular consumer product on January 1, 2017, for $160,000. It is expected that this product will generate cash flows for an indefinite period of time. The license has an initial term of 5 years but by paying a nominal fee, Sandhill can renew the license indefinitely for successive 5-year terms. What amount should be amortized for the year ended December 31, 2017?
The amount to be amortized |
$ |
1) | Original cost | $ 1,300,000 |
Amount amortized for two years (1300000/10)*2 = | $ 260,000 | |
Carrying amount at the beginning of 2017 | $ 1,040,000 | |
Balance life as per revised estimate = 6-2 = | 4 years | |
Amortization for the remaining 4 years = 1040000/4 = | $ 260,000 | |
Amortization for 2017 | $ 260,000 | |
Amount to be reported at December 31, 2017 = 1040000-260000 = | $ 780,000 | |
2) | The franchise is to be amortized over its estimated useful life. | |
As Sandhill, is unsure whether it will continue the franchise | ||
beyond 2025, the cost should be amortized over 10 years. | ||
Hence, amortization for 2017 = 400000/10 = | $ 40,000 | |
3) | As the costs incurred for organization purpose is to be expensed | |
the amount incurred should be reported as orginazation expense = | $ 300,000 | |
4) | AS the license can be easily renewed by paying a nominl fee, the | |
license can be deemed to be having an indefinite life. Hence, no | ||
cost is to be amortized. However, the license can be put to | ||
impairment test in future. |