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Information concerning Tully Corporation’s intangible assets is as follows:
- 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.
- 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.
- 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:
- 1. Prepare the intangible assets section of Tully’s balance sheet at December 31, 2019. Prepare supporting schedules showing related computations.
- 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.
1.
Prepare the intangible assets section of the balance sheet of Company T at December 31, 2019.
Intangible assets: These are the long-term assets which are not physical in nature, but possess value. The intangible assets would be amortized over their definite useful life or limited useful life, and those with indefinite or unlimited lives are not amortized.
Prepare the intangible assets section of the balance sheet of Company T at December 31, 2019 as follows:
| Company T | |
| Intangible assets section of balance sheet | |
| For the year ended December 31, 2019 | |
| Particulars | Amount |
| Franchise from Company R, net (Schedule 1) | $61,830 |
| Patent, net (Schedule 2) | $14,35 |
| Trademark, net (Schedule 3) | $42,706 |
| Total intangible assets | $118,886 |
Table (1)
Schedule 1:
Calculate the value of franchise from Company R.
| Particulars | Amount |
| Cost of franchise at January 1, 2019: | |
| Â Â Â Â Down payment | $25,000 |
| Â Â Â Â Present value of installments | $43,700 |
| Â Â Â Â Initial amount capitalized | $68,700 |
| Less: Amortization of franchise for 2019 (1) | $6,870 |
| Â Â Â Â Â Franchise balance on December 31, 2019 | $61,830 |
Table (2)
Schedule 2:
Calculate the value of patent.
| Particulars | Amount |
| Capitalized cost of patent at January 2, 2019-Legal fees and other cost associated with registration | $16,400 |
| Less: Amortization of patent for 2019 (2) | $2,050 |
| Patent balance on December 31, 2019 | $14,350 |
Table (3)
Schedule 3:
Calculate the value of patent.
| Particulars | Amount |
| Cost of trademark at July1, 2016 | $40,000 |
| Less: Amortization expense from July 1, 2016 to December 31, 2018 (3) | $5,000 |
| Less: Amortization expense from January 1,2019 to June 30, 2019 (4) | $1,000 |
| Add: Cost of successful litigation | $10,000 |
| Â Â Â Â Balance on July 1, 2019 | 44,000 |
| Less: Amortization expense from July 1, 2019 to December 31, 2019 (5) | $1,294 |
| Â Â Â Â Trademark balance on December 31, 2019 | $42,706 |
Table (4)
Note: Trademark has a limited useful life; hence it should be amortized over its useful life.
Working note (1):
Calculate the amortization of franchise for 2019.
Working note (2):
Calculate the amortization of patent for 2019.
Working note (3):
Calculate the amortization expense of trademark from July 1, 2016 to December 31, 2018
2.
Prepare a schedule showing all expenses of intangible assets that would appear on the income statement of Company T for the year ended December 31, 2019.
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