Question

Janes Company provided the following information on intangible assets:

1. A patent was purchased from the Lou Company for $1,700,000 on January 1, 2019. 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 $550,000 when Lou sold it to Janes.
2. During 2021, a franchise was purchased from the Rink Company for $700,000. 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 2021 as follows:
   

Materials and supplies	$	160,000
Personnel		200,000
Indirect costs		80,000
Total	$	440,000

4. Effective January 1, 2021, 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 2019 through 2021 to reflect the above information.
2. Prepare a schedule showing the intangible asset section of Janes’s December 31, 2021, balance sheet.

Entry 1: Record the purchase of a patent.

Entry 2: Record amortization on the patent.

Entry 3: Record amortization on the patent.

Entry 4: Record the purchase of a franchise.

Entry 5: Record amortization of franchise.

Entry 6: Record research and development expenses.

Entry 7: Record amortization on the patent after change in useful life.

Answer 1

1.

No.	Date	General Journal	Debit	Credit
1	Jan. 1, 2019	Patent	1700000
		Cash		1700000
		(To record purchase of patent)
2	Dec. 31, 2019	Amortization expense ($1700000/10)	170000
		Patent		170000
		(To record amortization expense)
3	Dec. 31, 2020	Amortization expense	170000
		Patent		170000
		(To record amortization expense)
4	2021	Franchise	700000
		Cash		700000
		(To record purchase of franchise)
5	Dec. 31, 2021	Amortization expense ($700000/10)	70000
		Franchise		70000
		(To record amortization expense)
6	2021	Research and development expense	440000
		Cash		440000
		(To record research and development costs incurred)
7	Dec. 31, 2021	Amortization expense [($1700000 - $340000)/5]	272000
		Patent		272000
		(To record amortization expense)

The change in estimate of the life of the patent is a change in an accounting estimate is accounted for prospectively by amortizing the remaining book value over the revised estimated life.

2.

Janes Company
Partial Balance Sheet
December 31, 2021
Assets
Intangible assets:
Patents	1088000
Franchise	630000
Total intangible assets	1718000

Patents = $1700000 - $170000 - $170000 - $272000 = $1088000

Franchise = $700000 - $70000 = $630000