Question

Presented below is selected information for Sheridan Company.

Answer the questions asked about each of the factual situations.

1. Sheridan purchased a patent from Vania Co. for $1,160,000 on January 1, 2015. The patent is being amortized over its remaining legal life of 10 years, expiring on January 1, 2025. During 2017, Sheridan 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. Sheridan bought a franchise from Alexander Co. on January 1, 2016, for $330,000. The carrying amount of the franchise on Alexander’s books on January 1, 2016, was $480,000. The franchise agreement had an estimated useful life of 30 years. Because Sheridan 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, Sheridan incurred organization costs of $265,000. What amount of organization expense should be reported in 2017?

The amount to be reported
$

4. Sheridan purchased the license for distribution of a popular consumer product on January 1, 2017, for $146,000. 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, Sheridan 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

SOLUTION

1. Sheridan should report the patent at $696,000 (net of $464,000 accumulated amortization) on the balance sheet. The computation of accumulated amortization is as follows-

	Amount ($)
Amortization for 2015 and 2016 [($1,160,000/10) * 2]	232,000
2017 Amortization [($1,160,000 - $232,000) / (6-2)]	232,000
Accumulated amortization, 12/31/17	464,000

2. Sheridan should amortize the franchise over its estimated useful life. Because it is uncertain that Sheridan will be able to retain the franchise at the end of 2025, it should be amortized over 10 years. The amount of amortization on the franchise for the year ended December 31, 2017 is $33,000 ($330,000 / 10)

3. These costs should be expensed as incurred. Therefore $265,000 of organization expense is reported in income for 2017.

4. Because the license can be easily renewed (at nominal cost), it has an indefinite life. Thus, no amortization will be recorded. The license will be tested for impairment in future periods.