Problem 12-3Information concerning Marigold Corporation’s intangible assets is as follows.1. On January 1, 2017, Marigold signed an agreement to operate as a franchisee of Hsian Copy Service, Inc. for an initial franchise fee of $80,000. Of this amount, $16,000 was paid when the agreement was signed, and the balance is payable in 4 annual payments of $16,000 each, beginning January 1, 2018. The agreement provides that the down payment is not refundable and no future services are required of the franchisor. The present value at January 1, 2017, of the 4 annual payments discounted at 10% (the implicit rate for a loan of this type) is $50,720. The agreement also provides that 8% of the revenue from the franchise must be paid to the franchisor annually. Marigold’s revenue from the franchise for 2017 was $800,000. Marigold estimates the useful life of the franchise to be 10 years. (Hint: You may want to refer to Chapter 18 to determine the proper accounting treatment for the franchise fee and payments.)2. Marigold incurred $80,000 of experimental and development costs in its laboratory to develop a patent that was granted on January 2, 2017. Legal fees and other costs associated with registration of the patent totaled $23,200. Marigold estimates that the useful life of the patent will be 8 years.3. A trademark was purchased from Shanghai Company for $46,000 on July 1, 2014. Expenditures for successful litigation in defense of the trademark totaling $-1,700 were paid on July 1, 2017. Marigold estimates that the useful life of the trademark will be 20 years from the date of acquisition.Prepare a schedule showing the intangible assets section of Marigold’s balance sheet at December 31, 2017. (Round all answers to 0 decimal places, e.g. 8,564.)MARIGOLD CORPORATIONIntangible Assets$  $

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Asked Apr 20, 2019
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Problem 12-3
Information concerning Marigold Corporation’s intangible assets is as follows.

1. On January 1, 2017, Marigold signed an agreement to operate as a franchisee of Hsian Copy Service, Inc. for an initial franchise fee of $80,000. Of this amount, $16,000 was paid when the agreement was signed, and the balance is payable in 4 annual payments of $16,000 each, beginning January 1, 2018. The agreement provides that the down payment is not refundable and no future services are required of the franchisor. The present value at January 1, 2017, of the 4 annual payments discounted at 10% (the implicit rate for a loan of this type) is $50,720. The agreement also provides that 8% of the revenue from the franchise must be paid to the franchisor annually. Marigold’s revenue from the franchise for 2017 was $800,000. Marigold estimates the useful life of the franchise to be 10 years. (Hint: You may want to refer to Chapter 18 to determine the proper accounting treatment for the franchise fee and payments.)
2. Marigold incurred $80,000 of experimental and development costs in its laboratory to develop a patent that was granted on January 2, 2017. Legal fees and other costs associated with registration of the patent totaled $23,200. Marigold estimates that the useful life of the patent will be 8 years.
3. A trademark was purchased from Shanghai Company for $46,000 on July 1, 2014. Expenditures for successful litigation in defense of the trademark totaling $-1,700 were paid on July 1, 2017. Marigold estimates that the useful life of the trademark will be 20 years from the date of acquisition.



Prepare a schedule showing the intangible assets section of Marigold’s balance sheet at December 31, 2017. (Round all answers to 0 decimal places, e.g. 8,564.)

MARIGOLD CORPORATION
Intangible Assets


$

 

 

$

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Expert Answer

Step 1

The amount of franchise fees to be capitalised is 

Initial fees on signing  -  $16,000

Add :Present Value of 4 installments- $50,720

So, the Franchise fee capitalised= 66,720

Annual amortisation of franchise fees= $66,720/10= $6,672

Annual franchise fees payment for 2017 is treated as expense for the year and not capitalised. The amount of $800,000*8%= $6,4000 is subtracted from gross sales to arrive at net sales 

So, in the Balance Sheet franchise would be presented as follows

 $
Franchise fees cost66,720
Less. amortisation for 20176,672
Carrying value on 31 Dec 201760,048
  

So, the 

Step 2

The R&D cost of internally develpoed patents must be treated as an expense. Only the legal fees and other registration cost need to be capitalised. So, the patent capitalised amount would be $23,200. The useful life is 8 years

So, the patent would be presented as follows

 $
Patent$23,200
Less. amortisation for 20172,900
Carrying value on  December 31, 201720,300
Step 3

3.  Trademark schedule can be prepared as follows

 $
Purchase (01/07/2014)46,000
less. amortisation till 2016( 2 years and 6 months)5,750
Value of trademark on 1/1/1740,250
Add litigation expenses (1/7/17)1,700
Less Amortisation for 2017(2300+50)2350
Carrying value on Dec 31,201739,600

 

Amortisation cost from 1/7/14-31/12/16 has been computed as follows

amortisation for 1 year= 46,000/20=$2300

Depreciation for 2.5 years= $5,750

 

After the litigation expenses were incurred, the useful life of the trademark remarks at 17 years, so per year amortisation=$1700/17=$100

So, the amortisation for 2017 =2300+50=$2,350

...

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