Question

a. A patent was purchased from the Lou Company for $1,600,000 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 $530,000 when Lou sold it to Janes.

b. During 2018, a franchise was purchased from the Rink Company for $680,000. The contractual life of the franchise is 10 years and Janes records a full year of amortization in the year of purchase.

c. Janes incurred research and development costs in 2018 as follows:

  

Materials and supplies	$	158,000
Personnel		198,000
Indirect costs		78,000
Total	$	434,000

  

d. 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

1.

Date	General Journal	Debit	Credit
Jan. 1, 2016	Patent	1600000
	Cash/Accounts payable		1600000
	(To record purchase of patent)
Dec. 31, 2016	Amortization expense ($1600000/10)	160000
	Patent		160000
	(To record amortization expense)
Dec. 31, 2017	Amortization expense	160000
	Patent		160000
	(To record amortization expense)
2018	Franchise	680000
	Cash/Accounts payable		680000
	(To record purchase of franchise)
2018	Research and development expense	434000
	Cash/Accounts payable		434000
	(To record research and development costs incurred)
Dec. 31, 2018	Amortization expense [($1600000 - $320000)/5]	256000
	Patent		256000
	(To record amortization expense)
Dec. 31, 2018	Amortization expense ($680000/10)	68000
	Franchise		68000
	(To record amortization expense)

Note: The change in estimate of the life of the patent is a change in an accounting estimate is accounted for prospectively by amortizing the remaining book value over the revised estimated life.

2.

Janes
Partial Balance Sheet
December 31, 2018
Assets
Intangible assets:
Patents	1024000
Franchise	612000
Total intangible assets	1636000