Question

Exercise 12-4

Presented below is selected information for Ivanhoe Company.

Answer the questions asked about each of the factual situations.

1. Ivanhoe purchased a patent from Vania Co. for $1,130,000 on January 1, 2015. The patent is being amortized over its remaining legal life of 10 years, expiring on January 1, 2025. During 2017, Ivanhoe determined that the economic benefits of the patent would not last longer than 6 years from the date of acquisition. What amount should be reported in the balance sheet for the patent, net of accumulated amortization, at December 31, 2017?

The amount to be reported

$

2. Ivanhoe bought a franchise from Alexander Co. on January 1, 2016, for $315,000. The carrying amount of the franchise on Alexander’s books on January 1, 2016, was $465,000. The franchise agreement had an estimated useful life of 30 years. Because Ivanhoe must enter a competitive bidding at the end of 2018, it is unlikely that the franchise will be retained beyond 2025. What amount should be amortized for the year ended December 31, 2017?

The amount to be amortized

$

3. On January 1, 2017, Ivanhoe incurred organization costs of $257,500. What amount of organization expense should be reported in 2017?

The amount to be reported

$

4. Ivanhoe purchased the license for distribution of a popular consumer product on January 1, 2017, for $143,000. It is expected that this product will generate cash flows for an indefinite period of time. The license has an initial term of 5 years but by paying a nominal fee, Ivanhoe can renew the license indefinitely for successive 5-year terms. What amount should be amortized for the year ended December 31, 2017?

The amount to be amortized

$

Answer 1

1. What amount should be reported in the balance sheet for the patent, net of accumulated depreciation, at December 31, 2017?

Answer: $ 678,000 should be reported in the balance sheet at the end of the period 2017.

Amortization Recorded up to 2016 = (1,130,000 / 10) x 2 = 226,000

Amortization to be recognized in 2017 = (1,130,000 – 226,000) / 4 = 226,000

2. What amount should be amortized for the year ended December 31, 2017?

Answer: $31,500 will be the amortization expense. (315,000 / 10)

Ivanhoe should amortize the franchise based on the useful life. As it is not certain that it is useful up to 30 years and it can be used up to 2025, so, it should be amortized up to 2025 only. It is assumed that the useful life has been 10 years from starting of acquisition.

3. What amount of organization expense should be reported?

Answer: $257,500 organization expense will be reported as it is amount the company has incurred.

4. What amount should be amortized for the year ended December 31, 2017?

Answer: Zero as it extends to indefinite life time of period.