12 Intangible Assets EXERCISES 12
EXERCISES
E12-1 (L01,2) (Classification Issues—Intangibles) The following is a list of items that could be included in the intangible assets section of the balance sheet.
1. Investment in a subsidiary company.
2. Timberland.
3. Cost of engineering activity required to advance the design of a product to the manufacturing stage.
4. Lease prepayment (6 months’ rent paid in advance).
5. Cost of equipment obtained.
6. Cost of searching for applications of new research findings.
7. Costs incurred in the formation of a corporation.
8. Operating losses incurred in the start-up of a business.
9. Training costs incurred in start-up of new operation.
10. Purchase cost of a franchise.
11. Goodwill generated internally.
12. Cost of testing in search for product alternatives.
13. Goodwill acquired in the purchase of a business.
14. Cost of developing a patent.
15. Cost of purchasing a patent from an inventor.
16. Legal costs incurred in securing a patent.
17. Unrecovered costs of a successful legal suit to protect the patent.
18. Cost of conceptual formulation of possible product alternatives.
19. Cost of purchasing a copyright.
20. Research and development costs.
21. Long-term receivables.
22. Cost of developing a trademark.
23. Cost of purchasing a trademark.
Instructions
(a) Indicate which items on the list above would generally be reported as intangible assets in the balance sheet.
(b) Indicate how, if at all, the items not reportable as intangible assets would be reported in the financial statements.
E12-2 (L01,2) (Classification Issues—Intangibles) Presented below is selected information related to Martin Burke Inc. at year-end. All these accounts have debit balances.
…
Instructions
Identify which items should be classified as an intangible asset. For those items not classified as an intangible asset, indicate where they would be reported in the financial statements.
E12-3 (L01,2) EXCEL (Classification Issues—Intangible Assets) Joni Hyde Inc. has the following amounts reported in its general ledger at the end of the current year…
Instructions
(a) On the basis of the information above, compute the total amount to be reported by Hyde for intangible assets on its balance sheet at year-end.
(b) If an item is not to be included in intangible assets, explain its proper treatment for reporting purposes.
E12-4 (L01,2,5) (Intangible Amortization) The following is selected information for Alatorre Company.
1. Alatorre purchased a patent from Vania Co. for $1,000,000 on January 1, 2015. The patent is being amortized over its remaining legal life of 10 years, expiring on January 1, 2025. During 2017, Alatorre 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?
2. Alatorre bought a franchise from Alexander Co. on January 1, 2016, for $400,000. The carrying amount of the franchise on Alexander’s books on January 1, 2016, was $500,000. The franchise agreement had an estimated useful life of 30 years.
Because Alatorre 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?
3. On January 1, 2017, Alatorre incurred organization costs of $275,000. What amount of organization expense should be reported in 2017?
4. Alatorre purchased the license for distribution of a popular consumer product on January 1, 2017, for $150,000. 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, Alatorre can renew the license indefinitely for successive 5-year terms. What amount should be amortized for the year ended December 31, 2017?
Instructions
Answer the questions asked about each of the factual situations.
E12-5 (L01,2,5) (Correct Intangible Assets Account) As the recently appointed auditor for Bryan Corporation, you have been asked to examine selected accounts before the 6-month financial statements of June 30, 2017, are prepared. The controller for Bryan Corporation mentions that only one account is kept for intangible assets. The account is shown below...
Instructions
Prepare the entry or entries necessary to correct this account. Assume that the patent has a useful life of 10 years.
E12-6 (L01,2,5) EXCEL (Recording and Amortization of Intangibles) Marshall Company, organized in 2016, has set up a single account for all intangible assets. The following summary discloses the debit entries that have been recorded during 2017...
Instructions
Prepare the necessary entries to clear the Intangible Assets account and to set up separate accounts for distinct types of intangibles.
Make the entries as of December 31, 2017, recording any necessary amortization and reflecting all balances accurately as of that date. (Use straight-line amortization.)
E12-7 (L01,2,4) (Accounting for Trade Name) In early January 2016, Outkast Corporation applied for a trade name, incurring legal costs of $16,000. In January 2017, Outkast incurred $7,800 of legal fees in a successful defense of its trade name.
Instructions
(a) Compute 2016 amortization, 12/31/16 book value, 2017 amortization, and 12/31/17 book value if the company amortizes the trade name over 10 years.
(b) Compute the 2017 amortization and the 12/31/17 book value, assuming that at the beginning of 2017, Outkast determines that the trade name will provide no future benefits beyond December 31, 2020.
(c) Ignoring the response for part (b), compute the 2018 amortization and the 12/31/18 book value, assuming that at the beginning of 2018, based on new market research, Outkast determines that the fair value of the trade name is $15,000. Estimated total future cash flows from the trade name is $16,000 on January 3, 2018.
E12-8 (L01,2,5) (Accounting for Patents, Franchises, and R&D) Carter Company has provided information on intangible assets as follows.
A patent was purchased from Ford Company for $2,000,000 on January 1, 2016. Carter estimated the remaining useful life of the patent to be 10 years. The patent was carried in Ford’s accounting records at a net book value of $2,000,000 when Ford sold it to Carter.
During 2017, a franchise was purchased from Polo Company for $480,000. In addition, 5% of revenue from the franchise must be paid to Polo. Revenue from the franchise for 2017 was $2,500,000. Carter estimates the useful life of the franchise to be 10 years and takes a full year’s amortization in the year of purchase.
Carter incurred research and development costs in 2017 as follows…
Carter estimates that these costs will be recouped by December 31, 2020. The materials and equipment purchased have no alternative uses.
On January 1, 2017, because of recent events in the field, Carter estimates that the remaining life of the patent purchased on January 1, 2016, is only 5 years from January 1, 2017.
Instructions
(a) Prepare a schedule showing the intangibles section of Carter’s balance sheet at December 31, 2017. Show supporting computations in good form.
(b) Prepare a schedule showing the income statement effect (related to expenses) for the year ended December 31, 2017, as a result of the facts above. Show supporting computations in good form.
(AICPA adapted)
E12-9 (L01,2,5) (Accounting for Patents) During 2013, Winston Corporation spent $170,000 in research and development costs. As a result, a new product called the New Age Piano was patented. The patent was obtained on October 1, 2013, and had a legal life of 20 years and a useful life of 10 years. Legal costs of $18,000 related to the patent were incurred as of October 1, 2013.
Instructions
(a) Prepare all journal entries required in 2013 and 2014 as a result of the transactions above.
(b) On June 1, 2015, Winston spent $9,480 to successfully prosecute a patent infringement suit. As a result, the estimate of useful life was extended to 12 years from June 1, 2015. Prepare all journal entries required in 2015 and 2016.
(c) In 2017, Winston determined that a competitor’s product would make the New Age Piano obsolete and the patent worthless by December 31, 2018. Prepare all journal entries required in 2017 and 2018.
E12-10 (L01,2,4) (Accounting for Patents) Tones Industries has the following patents on its December 31, 2016, balance sheet...
The proper discount rate to be used for these flows is 8%. (Assume that the cash flows occur at the end of the year.)
Instructions
(a) Compute the total carrying amount of Tones’ patents on its December 31, 2016, balance sheet.
(b) Compute the total carrying amount of Tones’ patents on its December 31, 2017, balance sheet.
E12-11 (L03) (Accounting for Goodwill) Fred Moss, owner of Moss Interiors, is negotiating for the purchase of Zweifel Galleries. The following balance sheet of Zweifel is given in an abbreviated form as follows...
Instructions
Prepare the entry to record the purchase of Zweifel Galleries on Moss’s books.
E12-12 (L01,2,3) (Accounting for Goodwill) On July 1, 2017, Brigham Corporation purchased Young Company by paying $250,000 cash and issuing a $100,000 note payable to Steve Young. At July 1, 2017, the balance sheet of Young Company was as follows...
Instructions
(a) Prepare the July 1 entry for Brigham Corporation to record the purchase.
(b) Prepare the December 31 entry for Brigham Corporation to record amortization of intangibles. The trademark has an estimated useful life of 4 years with a residual value of $3,000.
E12-13 (L04) (Copyright Impairment) Presented below is information related to copyrights owned by Mare Company at December 31, 2017...
Instructions
(a) Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2017. The company does not use accumulated amortization accounts.
(b) Prepare the journal entry to record amortization expense for 2018 related to the copyrights.
(c) The fair value of the copyright at December 31, 2018, is $3,400,000. Prepare the journal entry (if any) necessary to record the increase in fair value.
E12-14 (L03,4) (Goodwill Impairment) Presented below is net asset information related to the Carlos Division of Santana, Inc…
Instructions
(a) Prepare the journal entry (if any) to record the impairment at December 31, 2017.
(b) At December 31, 2018, it is estimated that the division’s fair value increased to $345 million. Prepare the journal entry (if any) to record this increase in fair value.
E12-15 (L05) (Accounting for Organization Costs) Angelou Corporation was organized in 2016 and began operations at the beginning of 2017. The company is involved in interior design consulting services. The following costs were incurred prior to the start of operations...
Instructions
(a) Compute the total amount of organization costs incurred by Angelou.
(b) Prepare the journal entry to record organization costs for 2017.
E12-16 (L02,5) (Accounting for R&D Costs) Price Company from time to time embarks on a research program when a special project seems to offer possibilities. In 2016, the company expends $325,000 on a research project, but by the end of 2016 it is impossible to determine whether any benefit will be derived from it.
Instructions
(a) What account should be charged for the $325,000, and how should it be shown in the financial statements?
(b) The project is completed in 2017, and a successful patent is obtained. The R&D costs to complete the project are $110,000.
The administrative and legal expenses incurred in obtaining patent number 472-1001-84 in 2017 total $16,000. The patent has an expected useful life of 5 years. Record these costs in journal entry form. Also, record patent amortization (full year) in 2017.
(c) In 2018, the company successfully defends the patent in extended litigation at a cost of $47,200, thereby extending the patent life to December 31, 2025. What is the proper way to account for this cost? Also, record patent amortization (full year) in 2018.
(d) Additional engineering and consulting costs incurred in 2018 required to advance the design of a product to the manufacturing stage total $60,000. These costs enhance the design of the product considerably. Discuss the proper accounting treatment for this cost.
E12-17 (L05) (Accounting for R&D Costs) More Company incurred the following costs during the current year in connection with its research and development activities…
Instructions
Compute the amount to be reported as research and development expense by More on its current year income statement.
Assume equipment is purchased at the beginning of the year.
