Question

Problem 12-3 Information concerning Monty Corporation’s intangible assets is as follows. 1. On January 1, 2017, Monty signed an agreement to operate as a franchisee of Hsian Copy Service, Inc. for an initial franchise fee of $60,000. Of this amount, $12,000 was paid when the agreement was signed, and the balance is payable in 4 annual payments of $12,000 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 $38,040. The agreement also provides that 6% of the revenue from the franchise must be paid to the franchisor annually. Monty’s revenue from the franchise for 2017 was $830,000. Monty 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. Monty incurred $60,000 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 $20,000. Monty estimates that the useful life of the patent will be 8 years. 3. A trademark was purchased from Shanghai Company for $48,000 on July 1, 2014. Expenditures for successful litigation in defense of the trademark totaling $27,200 were paid on July 1, 2017. Monty 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 Monty’s balance sheet at December 31, 2017. (Round all answers to 0 decimal places, e.g. 8,564.) MONTY CORPORATION Intangible Assets $ $ Prepare a schedule showing all expenses resulting from the transactions that would appear on Monty’s income statement for the year ended December 31, 2017. (Round all answers to 0 decimal places, e.g. 8,564.) MONTY CORPORATION Expenses Resulting from Selected Intangible Assets Transactions $ $

Answer 1

Monty Corporation

Balance Sheet ( Partial)

December 31, 2017

Franchise, net of accumulated amortization $ 5,004 ( Schedule A)	$ 45,036
Patent, net of accumulated amortization $ 2,500	17,500
Trademark, net of accumulated amortization $ 9,200	66,000
Total Intangible Assets	$ 128,536

Schedule A : Franchise

Cost of the franchise = $ 12,000 + $ 38,040 = $ 50,040.

Amortization expense for 2017 = $ 50,040 / 10 = $ 5,004.

Schedule B: Patent

Cost of registration of patent : $ 20,000.

Amortization expense for 2017 = $ 20,000 / 8 = $ 2,500.

Schedule C: Trademark

Cost of Patent	48,000
Accumulated amortization ( July 1 2014 - June 30 2017)	7,200
Book Value, June 30, 2017	40,800
Successful defense cost	27,200
Book Value, July 1, 2017	68,000
Amortization expense ( 68,000 / 17 x 1/2)	2,000
Book Value, December 31, 2017	66,000

Monty Corporation

Expenses Resulting from Selected Intangible Asset Transactions:

Franchise Amortization	$ 5,004
Patent Amortization	2,500
Trademark Amortization	3,200
Franchise Fee ( $ 830,000 x 6%)	49,800
Interest Expense ( $ 38,040 x 10%)	3,804
Total	64,308