Question

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.

a) Prepare a schedule showing the intangible assets section of Marigold ’s balance sheet at December 31, 2017. Show supporting computations in good form.
(b) Prepare a schedule showing all expenses resulting from the transactions that would appear on Marigold ’s income statement for the year ended December 31, 2017. Show supporting computations in good form.

Answer 1

1
01-Jan-17	Patent	66720	=16000+50720
	Useful Life	10 years
	Annual Amortization on straight Line	6672	=66720/10
31-12-17	Patent	60048	=66720-6672
2	Inhouse developed Patent	103200	=80000+23200
	Useful Life	8	years
	Annual Amortization	12900	=103200/8
31-12-17	Inhouse developed Patent	90300	=103200-12900
3
01-07-14	Trademark	46000
	Useful life	20
	Annual amortization	2300
31-12-17	Trademark	39600	=46000-2300*3.5+1700/17*16.5
a)	Balance Sheet schedule as on 31st Dec 2017
	Intangibles
	Patent	60,048
	Inhouse developed Patent	90300
	Income Statement for 2017
	Expenses
	Royalty fees	64,000	=800000*8%
	Interest Exp	5072	=50720*10%
	Amortization
	Patent	6672
	Inhouse developed Patent	12900
	Trademark	2350	=2300+1700/17*.5