Question

In: Accounting

The intangible assets section of Sappelt Company at December 31, 2017, is presented below.

Patents ($70,000 cost less $7,000 amortization)......................................$63,000

Franchises ($48,000 cost less $19,200 amortization)................................28,800

Total...........................................................................................................................$91,800

The patent was acquired in January 2017 and has a useful life of 10 years. The franchise was acquired in January 2014 and also has a useful life of 10 years. The following cash transactions may have affected intangible assets during 2018.

Jan. 2 Paid $27,000 legal costs to successfully defend the patent against infringement by another company.

Jan.–June Developed a new product, incurring $140,000 in research and development costs. A patent was granted for the product on July 1. Its useful life is equal to its legal life.

Sept. 1 Paid $50,000 to an extremely large defensive lineman to appear in commercials advertising the company’s products. The commercials will air in September and October.

Oct. 1 Acquired a franchise for $140,000. The franchise has a useful life of 50 years.

Instructions

(a) Prepare journal entries to record the transactions above.

(b) Prepare journal entries to record the 2018 amortization expense.

(c) Prepare the intangible assets section of the balance sheet at December 31, 2018.

Expert Solution

(a)

Date	Account Titles and Explanation	Debit	Credit
Jan. 2, 2018	Patents	27000
	Cash		27000
	(To record legal costs to successfully defend the patent)
Jan.-June 2018	Research and development expense	140000
	Cash		140000
	(To record research and development costs incurred)
Sept. 1, 2018	Advertising expense	50000
	Cash		50000
	(To record advertising costs incurred)
Oct. 1, 2018	Franchises	140000
	Cash		140000
	(To record franchise acquisition costs)

The advertising costs are expensed out as incurred or when the advertisement is run for the first time.

(b)

Date	Account Titles and Explanation	Debit	Credit
Dec. 31, 2018	Amortization expense - Patents	10000
	Accumulated Amortization - Patents		10000
	[($70000/10 years) + ($27000/9 years)]
	(To record amortization of patents)
Dec. 31, 2018	Amortization expense - Franchises	5500
	Accumulated Amortization - Franchises		5500
	[($48000/10 years) + ($140000/50 years x 3/12)]
	(To record amortization of franchises)

Note: The legal costs incurred to successfully defend the patent are amortized over the remaining useful life of the patent which is 9 years.

(c)

Sappelt Company
Balance Sheet (Partial)
At December 31, 2018
Intangible Assets:
Patents ($97,000 cost less $17,000 amortization)	80000
Franchises ($188,000 cost less $24,700 amortization)	163300
Total Intangible Assets	243300

The advertising costs are expensed out as incurred or when the advertisement is run for the first time.

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