Question

Information concerning Monty Corporation’s intangible assets is as follows.

1.		On January 1, 2017, Monty signed an agreement to operate as a franchisee of Hsian Copy Service, Inc. for an initial franchise fee of $60,000. Of this amount, $12,000 was paid when the agreement was signed, and the balance is payable in 4 annual payments of $12,000 each, beginning January 1, 2018. The agreement provides that the down payment is not refundable and no future services are required of the franchisor. The present value at January 1, 2017, of the 4 annual payments discounted at 10% (the implicit rate for a loan of this type) is $38,040. The agreement also provides that 6% of the revenue from the franchise must be paid to the franchisor annually. Monty’s revenue from the franchise for 2017 was $830,000. Monty estimates the useful life of the franchise to be 10 years. (Hint: You may want to refer to Chapter 18 to determine the proper accounting treatment for the franchise fee and payments.)
2.		Monty incurred $60,000 of experimental and development costs in its laboratory to develop a patent that was granted on January 2, 2017. Legal fees and other costs associated with registration of the patent totaled $20,000. Monty estimates that the useful life of the patent will be 8 years.
3.		A trademark was purchased from Shanghai Company for $48,000 on July 1, 2014. Expenditures for successful litigation in defense of the trademark totaling $27,200 were paid on July 1, 2017. Monty estimates that the useful life of the trademark will be 20 years from the date of acquisition.Prepare a schedule showing the intangible assets section of Monty’s balance sheet at December 31, 2017.Prepare a schedule showing all expenses resulting from the transactions that would appear on Monty’s income statement for the year ended December 31, 2017

Answer 1

(a)	Monty Corporation
Intangible Assets
December 31, 2017
Franchise, net of accumulated amortization of $5004
(Schedule 1)		$45036
Patent, net of accumulated amortization of $2500
(Schedule 2)		17500
Trademark, net of accumulated amortization of $9200
(Schedule 3)		66000
Total intangible assets		$128536
Schedule 1                     Franchise
Cost of franchise on 1/1/17 ($12000 + $38040)		$50040
2017 amortization ($50040 X 1/10)		(5004)
Cost of franchise, net of amortization		$45036
Schedule 2                       Patent
Cost of securing patent on 1/2/17		$20000
2017 amortization ($20000 X 1/8)		(2500)
Cost of patent, net of amortization		$17500
Schedule 3                     Trademark
Cost of trademark		$48000
Amortization, ($48000 X 3/20)		(7200)
Book value		40800
Cost of successful legal defense		27200
Book value after legal defense		68000
Amortization, ($68000 X 1/17 X 6/12)		(2000)
Cost of trademark, net of amortization		$66000

(b)	Monty Corporation
Expenses Resulting from Selected Intangible Assets Transactions
For the Year Ended December 31, 2017
Interest expense ($38040 X 10%)		$ 3804
Franchise amortization (Schedule 1)		5004
Franchise fee ($830,000 X 6%)		49800
Patent amortization (Schedule 2)		2500
Trademark amortization (Schedule 4)		3200
Total intangible assets		$64308

Schedule 4           Trademark Amortization
Amortization, ($48000 X 1/20 X 6/12)	$    1200
Amortization, ($68000 X 1/17 X 6/12)	2000
Total trademark amortization	$3200