Question

Ayayai Corp., a public company incorporated on June 28, 2019, set up a single account for all of its intangible assets. The following summary discloses the debit entries that were recorded during 2019 and 2020 in that account:

INTANGIBLE ASSETS-AYAYAI
July
1,   2019       8-year franchise; expiration date of June 30, 2027       $42,000
Oct.
1           Advance payment on office lease (2-year lease)
28,000
Dec.   31
Net loss for 2019 including incorporation fee, $1,000; related legal fees of organizing, $5,100;
expenses of recruiting and training staff for start-up of new business, $3,700       17,000
Feb.
15,   2020       Patent purchased (10-year life)
74,400
Mar.   1           Direct costs of acquiring a 5-year licensing agreement
75,000
Apr.   1           Goodwill purchased (indefinite life)
278,400
June   1           Legal fee for successful defence of patent (see above)
12,815
Dec.   31           Costs of research department for year
75,000
31           Royalties paid under licensing agreement (see above)
2,775

The new business started up on July 2, 2019. No amortization was recorded for 2019 or 2020. The goodwill purchased on April 1, 2020, includes in-process development costs that meet the six development stage criteria, valued at $173,000. The company estimates that this amount will help it generate revenues over a 10-year period.

(a)

Prepare the necessary entries to clear the Intangible Assets account and to set up separate accounts for distinct types of intangibles. Make the entries as at December 31, 2020, and record any necessary amortization so that all balances are appropriate as at that date. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to 0 decimal places, e.g. 5,275.)

Date
Account Titles and Explanation
Debit
Credit
Dec. 31, 2020

(To clear Intangible Assets account)
Dec. 31, 2020

(To correct for amortization on franchises)
Dec. 31, 2020

(To correct for rent payments)
Dec. 31, 2020

(To record amortization
expense on patents)
Dec. 31, 2020

(To record amortization
expense on licences)
Dec. 31, 2020

(To record amortization expense
on development cost)

Answer 1

Date	Account Titles and Explanation	Debit	Credit
Dec. 31, 2020	Franchises	$   42,000.00
	Prepaid Rent	$   28,000.00
	Retained Earnings (Organization Costs of $9800 in 2019)	$     9,800.00
	Retained Earnings (17000 - 9800)	$     7,200.00
	Patents (74,400 + 12,815)	$   87,215.00
	Licenses (75000+ 2775)	$   77,775.00
	Research and Development Expense	$ 248,000.00
	Goodwill (278400 -173000)	$ 105,400.00
	Intangible Assets		$ 605,390.00
	(To clear Intangible Assets account)
Dec. 31, 2020	Franchise Amortization Expense ($42,000 ÷ 8)	$     5,250.00
	Retained Earnings ($42000 ÷ 8 X 6/12)	$     2,625.00
	Franchise		$     7,875.00
	(To correct for amortization on franchises)
Dec. 31, 2020	Rent Expense ($28,000 ÷ 2)	$   14,000.00
	Retained Earnings ($28,000 ÷ 2 X 3/12)	$     3,500.00
	Prepaid Rent		$   17,500.00
Dec. 31, 2020	Patent Amortization Expense	$     8,220.04
	Patent ($74,400 ÷ 10) + ($12,815 X 7/115)		$     8,220.04
	(To record amortization expense on patents)
Dec. 31, 2020	Licensing Amortization Expense ($77,775 ÷ 5)	$   15,555.00
	Licenses		$   15,555.00
	(To record amortization expense on licences)
Dec. 31, 2020	Research and Development Amortization Expense	$   24,800.00
	Research and Development (248,000  ÷ 10)		$   24,800.00
	(To record amortization expense on development cost)