Question

Janes Company provided the following information on intangible assets:

A patent was purchased from the Lou Company for $1,250,000 on January 1, 2016. Janes estimated the remaining useful life of the patent to be 10 years. The patent was carried on Lou’s accounting records at a net book value of $460,000 when Lou sold it to Janes.

During 2018, a franchise was purchased from the Rink Company for $610,000. The contractual life of the franchise is 10 years and Janes records a full year of amortization in the year of purchase.

Janes incurred research and development costs in 2018 as follows:

  

Materials and supplies	$	151,000
Personnel		191,000
Indirect costs		71,000
Total	$	413,000

  

Effective January 1, 2018, based on new events that have occurred, Janes estimates that the remaining life of the patent purchased from Lou is only five more years.

Required:
1. Prepare the entries necessary for years 2016 through 2018 to reflect the above information.
2. Prepare a schedule showing the intangible asset section of Janes’s December 31, 2018, balance sheet.

Answer 1

Solution:

1. Prepare the entries necessary for years 2016 through 2018 to reflect the above information.

Journal entries

Date	Account titles and explanation	Debit($)	Credit($)
Jan 1, 2016	Patent A/c Dr	$1,250,000
	To cash A/c		$1,250,000
Dec 31, 2016	Amortization expenses A/c Dr	$125,000
	To Patent A/c		$125,000
Dec 31, 2017	Amortization expenses A/c Dr	$125,000
	To Patent A/c		$125,000
Dec 31, 2018	Furniture A/c Dr	$610,000
	To cash A/c		$610,000
"	R&D expenses A/c Dr	$413,000
	To cash A/c		$413,000
"	Amortization expenses A/c Dr	$200,000
	To Patent A/c		$200,000

Workings:

Estimated years = 5 years

Amortization expense for patent 31 Dec 2018 :

Patent cost at jan 1,2016	$1,250,000
Less: Amortization cost on Dec 31,2016	($125,000)
	$1,125,000
Less: Amortization cost on Dec 31,2017	($125,000)
	$1,000,000

$1,000,000/5 = $200,000

2. Prepare a schedule showing the intangible asset section of Janes’s December 31, 2018, balance sheet.

Balance sheet as on 31 Dec, 2018
Intangible assets:
Franchise (610,000 - 61,000)	$549,000
Patent (1,000,000 - 200,000)	$800,000
	$1,349,000