Question

Exercise 12-4

Presented below is selected information for Cullumber Company.

Answer the questions asked about each of the factual situations.

1. Cullumber purchased a patent from Vania Co. for $1,120,000 on January 1, 2015. The patent is being amortized over its remaining legal life of 10 years, expiring on January 1, 2025. During 2017, Cullumber 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. Cullumber bought a franchise from Alexander Co. on January 1, 2016, for $310,000. The carrying amount of the franchise on Alexander’s books on January 1, 2016, was $460,000. The franchise agreement had an estimated useful life of 30 years. Because Cullumber 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, Cullumber incurred organization costs of $255,000. What amount of organization expense should be reported in 2017?

The amount to be reported

$

4. Cullumber purchased the license for distribution of a popular consumer product on January 1, 2017, for $142,000. 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, Cullumber 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

$

Answer 1

Answer to Q.1

Carrying value of Patent = $1,120,000

Amortization of patent for each year = 1,120,000/10

= $112,000

Amortization for 2 years (31st Dec 2015, 31st Dec 2016) = 112,000*2 = $ 224,000

Total Carrying value of Patent as on 31st Dec,2016 = $ 1,112,000-224,000

= $896,000

During 2017, the remaining life of patent revised to 6 years. Therefore Remaining carrying value of patent should be amortized over remaining 6 years

Amortization cost in 2017 = $896,000/6 = $149,333

Remaing carring value of patent as on 31st Dec,2017 = $896,000-$149,333

= $ 746,667

Answer to Q.2

Carrying value of franchise as on Jan1, 2016 = $460,000

Estimated useful life = 30 years

Amortization cost during the year 2016 = $460,000/30 = $15,333

Carrying value as on 31st Dec,2016 = $460,000 - $15,333

= 444,667

During the year 2017 the remaining useful life to not beyong 2025. the remaining useful life should be 9 years remaining

Amortization cost for the year ended 31st Dec,2017 = $444,667/9 = $49,407

Answer to Q.3

The organization costs of $225,000 is write off in same year, no need to be amortized. Therefore, Organization costs of $225,000 is reported in the year 2017

Answer to Q.4

The licence will able to generate cash flows for an indefinite period. So, We should consider 10 years as amortization period including renewal period

Amortization cost for the year ended 31 Dec,2017 = $142,000/10 = $14,200