Question

Intangibles: Balance Sheet Presentation and Income Statement Effects

Bringle Company has provided information on intangible assets as follows:

1. A patent was purchased from Lou Company for $1,665,000 on January 1, 2018. Bringle estimated the remaining useful life of the patent to be 15 years. The patent was carried in Lou's accounting records at a net book value of $1,315,000 when Lou sold it to Bringle.
2. During 2019, a franchise was purchased from Rink Company for $590,000. In addition, 5% of revenue from the franchise must be paid to Rink. Revenue from the franchise for 2019 was $1,700,000. Bringle estimates the useful life of the franchise to be 5 years and takes a full year's amortization in the year of purchase.
3. Bringle incurred R&D costs in 2019 as follows:
   

   Materials and equipment	$126,000
   Personnel	157,000
   Indirect costs	54,000
   	$337,000

   
   Bringle estimates that these costs will be recouped by December 31, 2020.
4. On January 1, 2019, Bringle estimates, based on new events, that the remaining life of the patent purchased on January 1, 2018, is only 10 years from January 1, 2019.

Required:

1. Prepare a schedule showing the intangibles section of Bringle's balance sheet at December 31, 2019.

Bringle Company
Intangible Assets Section of Balance Sheet
December 31, 2019
Patent, net (Schedule 1)	$
Franchise from Rink Company, net (Schedule 2)
Intangible assets	$
Schedule 1: Computation of Patent from Lou Company
Cost of patent at date of purchase	$
Amortization of patent for 2018
	$
Amortization of patent for 2019
Patent balance	$
Schedule 2: Computation of Franchise from Rink Company
Cost of franchise at date of purchase	$
Amortization of franchise for 2019
Franchise balance	$

2. Prepare a schedule showing the income statement effects for the year ended December 31, 2019, as a result of the previously mentioned facts.

Bringle Company
Income Statement Effects
For the Year Ended December 31, 2019
Patent from Lou Company:
		$
Franchise from Rink Company:
	$
Total expenses		$

Answer 1

Bringle Company
Income section for cost of Intangibles for the period 1st Jan 2019 to 31st Dec 2019
Particulars	Amount	Basis
Amortisation for Patent	270,000.00
Amortisation for Franchise	50,000.00
Frachise Cost	100,000.00	2000000*5%
R&D Cost	337,000.00
Total Expense	757,000.00

Bringle Company
Intangible section of balance sheet as on December 31 2019
Particulars	Amount
Net cost of Patent	1,080,000.00
Net cost of Franchise	450,000.00
Total Intangible asset	1,530,000.00

Working Notes :

a) Schedule of Patent

Particulars	Amount	Basis of Calculation
Cost of Patent 1-Jan 2018	1,500,000.00
Less : Amortisation for 2018	150,000.00	1500000/10
Net Value of Patent at end of 2018	1,350,000.00
Less : Amortisation for 2019	270,000.00	1350000/5
Net Value of Patent at end of 2019	1,080,000.00

Note : As on 1st Jan 2019 the remaining life of patent is considered 5 year hence net value of 1,350,000 will be amortized over 5 year

b) Schedule of Franchise Cost

Particulars	Amount	Basis of Calculation
Cost of Purchase	500,000.00
Less : Amortisation for 2019	50,000.00	500000/10
Net Value of Franchise at end of 2019	450,000.00

Note : For franchise the entire year of depreciation is claimed in the year of purchase hence full amortisation cost is considred in 2019

c R&D Cost expensed to P&L

Under US GAAP R&D expense is expenses out in the year incurred. It is assumed that accounting is carried out as per US GAAP hence they are expenses out. However IFRS provides guidance that R&D cost can be capitalised when they meet recognition criteria.