Question

Janes Company provided the following information on intangible assets:

1. A patent was purchased from the Lou Company for $1,300,000 on January 1, 2016. Janes estimated the remaining useful life of the patent to be 10 years. The patent was carried on Lou’s accounting records at a net book value of $470,000 when Lou sold it to Janes.
2. During 2018, a franchise was purchased from the Rink Company for $620,000. The contractual life of the franchise is 10 years and Janes records a full year of amortization in the year of purchase.
3. Janes incurred research and development costs in 2018 as follows:

  

Materials and supplies	$	152,000
Personnel		192,000
Indirect costs		72,000
Total	$	416,000

  

4. Effective January 1, 2018, based on new events that have occurred, Janes estimates that the remaining life of the patent purchased from Lou is only five more years.

Required:
1. Prepare the entries necessary for years 2016 through 2018 to reflect the above information.
2. Prepare a schedule showing the intangible asset section of Janes’s December 31, 2018, balance sheet.

Answer 1

Answer
Requirement-1
	Journal	debit	credit
01-Jan-16	Patent	$     13,00,000
	To cash		$              13,00,000
	(To record purchase of patent)
31-Dec-16	Amortization expense ($1300000/10)	$       1,30,000
	To patent		$                1,30,000
	(To record amortization expense)
31-Dec-17	amortization expense	$       1,30,000
	To patent		$                1,30,000
	(To record amortization expense on patent)
2018	Franchise	$       6,20,000
	To cash		$                6,20,000
	(To record purchase of franchise)
2018	Research and devlopement expense	$       4,16,000
	To cash		$                4,16,000
	(To record research and devlopement expense)
31-Dec-18	Amortization expense	$ 2,08,000***
	To patent		$                2,08,000
	(To record amortization expense on patent)
	Amortization expense ($620000/10)	$          62,000
	To franchise		$                   62,000
	(To record amortization expense on franchise)
*** Amortization expense on patent = ($130000-$130000-$130000)/5 = $136000

Requirement-2
Balance Sheet
31-Dec-18
Intangible Assets:
Patent	$   13,00,000
Less: Amortization expense	$     4,68,000
Net patents		$ 8,32,000
Franchise	$     6,20,000
Less: Amortization expense	$        62,000
Net Franchise		$ 5,58,000
Total intangibles		$13,90,000
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