Textbook Problem

Information concerning Tully Corporation’s intangible assets is as follows:

1. a. On January 1, 2019, Tully signed an agreement to operate as a franchisee of Rapid Copy Service Inc. for an initial franchise fee of $85,000. Of this amount, $25,000 was paid when the agreement was signed, and the balance is payable in 4 annual payments of $15,000 each beginning January 1, 2020. The agreement provides that the down payment is not refundable and no future services are required of the franchisor. The present value at January 2, 2019, of the 4 annual payments discounted at 14% (the implicit rate for a loan of this type) is $43,700. The agreement also provides that 5% of the revenue from the franchise must be paid to the franchisor annually. Tully’s revenue from the franchise for 2019 was $900,000. Tully estimates the useful life of the franchise to be 10 years.
2. b. Tully incurred $78,000 of experimental and development costs in its laboratory to develop a patent, which was granted on January 2, 2019. Legal fees and other costs associated with registration of the patent totaled $16,400. Tully estimates that the useful life of the patent will be 8 years.
3. c. A trademark was purchased from Walton Company for $40,000 on July 1, 2016. Expenditures for successful litigation in defense of the trademark totaling $10,000 were paid on July 1, 2019. Tully estimates that the useful life of the trademark will be 20 years from the date of acquisition.

   Required:

4. 1. Prepare the intangible assets section of Tully’s balance sheet at December 31, 2019. Prepare supporting schedules showing related computations.
5. 2. Prepare a schedule showing all expenses resulting from the transactions that would appear on Tully’s income statement for the year ended December 31, 2019. Show supporting computations or reference supporting schedules prepared for part 1.