In: Accounting
Information concerning Marigold Corporation’s intangible assets is as follows.
1. | On January 1, 2017, Marigold signed an agreement to operate as a franchisee of Hsian Copy Service, Inc. for an initial franchise fee of $80,000. Of this amount, $16,000 was paid when the agreement was signed, and the balance is payable in 4 annual payments of $16,000 each, beginning January 1, 2018. The agreement provides that the down payment is not refundable and no future services are required of the franchisor. The present value at January 1, 2017, of the 4 annual payments discounted at 10% (the implicit rate for a loan of this type) is $50,720. The agreement also provides that 8% of the revenue from the franchise must be paid to the franchisor annually. Marigold’s revenue from the franchise for 2017 was $800,000. Marigold estimates the useful life of the franchise to be 10 years. (Hint: You may want to refer to Chapter 18 to determine the proper accounting treatment for the franchise fee and payments.) | |
2. | Marigold incurred $80,000 of experimental and development costs in its laboratory to develop a patent that was granted on January 2, 2017. Legal fees and other costs associated with registration of the patent totaled $23,200. Marigold estimates that the useful life of the patent will be 8 years. | |
3. | A trademark was purchased from Shanghai Company for $46,000 on July 1, 2014. Expenditures for successful litigation in defense of the trademark totaling $-1,700 were paid on July 1, 2017. Marigold estimates that the useful life of the trademark will be 20 years from the date of acquisition. |
Prepare a schedule showing the intangible assets section of Marigold’s balance sheet at December 31, 2017.
Solution:- = Schedule of Intangible assets as on Decmber 31,2017:-
Particulars Amounts
1. Franchise { Refer Note.1 below} = $ 117648
2. Self-development assets i.e. ( patent) {Refer Note.2 below} = $ 90300
3. Trademark {Refer Note.3 below} = $ 39600
Total = $ 247548
Note:-1 = As per accounting standards if payment made in installment then there present value should be taken for calculation hence amount incurred { $ 16000+ $50720 + $64000 ( $ 800000 * 8% = 64000) } = $ 130720
Amortise value = $ 130720 / 10 = $ 13720
Value showned in balance sheet = 130720- 13072 = $ 117648
Notes:- 2. = As per accounting standards-38 when an company self-develop any intangible assets and its future economic benefits is easily measurable then we should capitalise its cost and any further cost related to intangible assets to make its usable like (Legal fees) then such cost is also include in the assets. And such intangible assets amortise over the usefull life as follows:-
Amounts incurred = $ 80000
Add: Legal fees = $ 23200
Total = $ 103200
Amounts showned in Balance sheet = $ 90300 { $103200 - $12900 }
{103200 / 8 = $ 12900}
Note.3 = As per accounting standards if rarely any sebsequent expenditure incurred on intangible assets then such expenditure should be capitalised and amortisre for remaining period of life as follows:-
Intangible assets value on July-17 = $ 39100 ($46000 - $6900)
{ $ 46000 / 20 * 3 = 6900}
Add = Litigation expenses = $ 1700
Total = $ 40800
Value showned in Balance sheet = $ 40800 - $ 1200 = $ 39600 {$ 40800 / 17 = $ 2400}
( But only $ 1200 will be deducted because from july to dec only 6 months)