Question

Intangibles: Balance Sheet Presentation and Income Statement Effects

Sempton Company has provided information on intangible assets as follows:

1. A patent was purchased from Lou Company for $1,230,000 on January 1, 2018. Sempton estimated the remaining useful life of the patent to be 10 years. The patent was carried in Lou's accounting records at a net book value of $980,000 when Lou sold it to Sempton.
2. During 2019, a franchise was purchased from Rink Company for $390,000. In addition, 6% of revenue from the franchise must be paid to Rink. Revenue from the franchise for 2019 was $1,900,000. Sempton estimates the useful life of the franchise to be 10 years and takes a full year's amortization in the year of purchase.
3. Sempton incurred R&D costs in 2019 as follows:
   

   Materials and equipment	$100,000
   Personnel	136,000
   Indirect costs	76,000
   	$312,000

   
   Sempton estimates that these costs will be recouped by December 31, 2020.
4. On January 1, 2019, Sempton estimates, based on new events, that the remaining life of the patent purchased on January 1, 2018, is only 5 years from January 1, 2019.

Required:

1. Prepare a schedule showing the intangibles section of Sempton's balance sheet at December 31, 2019.

Sempton Company
Intangible Assets Section of Balance Sheet
December 31, 2019
Patent, net (Schedule 1)	$
Franchise from Rink Company, net (Schedule 2)
Intangible assets	$
Schedule 1: Computation of Patent from Lou Company
Cost of patent at date of purchase	$
Amortization of patent for 2018
	$
Amortization of patent for 2019
Patent balance	$
Schedule 2: Computation of Franchise from Rink Company
Cost of franchise at date of purchase	$
Amortization of franchise for 2019
Franchise balance	$

2. Prepare a schedule showing the income statement effects for the year ended December 31, 2019, as a result of the previously mentioned facts.

Sempton Company
Income Statement Effects
For the Year Ended December 31, 2019
Patent from Lou Company:
		$
Franchise from Rink Company:
	$
Total expenses		$

Answer 1

Answer :-

Sempton company

1. Intangible Assets Section of Balance Sheet

Han Company
Balance Sheet (Intangible Assets Section)
As on December 31, 2019
Patent, net (Schedule 1)	$980,000
Franchise from Rink Company, net (Schedule 2)	$351000
Intangible Assets	$1331000

Schedule 1 –

Calculation of net value of the patent:

Purchase cost of the patent on January 1, 2018 -       $1230000

Estimated remaining useful life of the patent = 10 years

Amortization expense for 2018 = 1230000/10 = $123000

Patent net value at January 1, 2019 = $1230000– 123000= $1107000

Re-estimated remaining life of the patent from January 1, 2019 = 5years

Amortization expense for 2019 = net value/remaining life

= 1107000/5 = $221400

Net value of patent at December 31, 2019 = 1107000– 221400= $885600

Accumulated Amortization at December 31, 2019 = 123000+ 221400= $344400

Schedule 2 –

Calculation of the net value of the franchise:

Cost of franchise at date of purchase in 2019 = $390000

Useful life of franchise – 10 years

Amortization expense = 390000/10 = $39000

Net value of the franchise at December 31, 2019 = $390000– 39000= $351000

Accumulated amortization – franchise at December 31, 2019 = $39000

1. Schedule showing the income statement effects for the year ended December 31, 2019:

Sempton company
Income Statement Effects
For the year Ended December 31, 2019
Patent from Lou Company
Amortization Expense	$221400	$221400
Franchise from Rink Company:
Amortization expense	$351000
Franchise fees expense	$114000	$465000
Research and development expense	$312000
Total Expenses	$998400

Note: the amortization expense of patent related to the year 2018, $123,000 would be recorded in the income statement for 2018 and hence not included in the income statement for 2019. Current year patent amortization expense of $221,400 is included in the income statement for the year ended December 31, 2019.

Franchise fees expense = 5% of franchise revenue

= 6% x 1,900,000 = $114000

The entire research and development expense is accounted for in the year incurred and hence $312000 is included in the income statement for 2019.