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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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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.

1.

To determine

Prepare the intangible assets section of the balance sheet of Company T at December 31, 2019.

Explanation

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
ParticularsAmount
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.

ParticularsAmount
Cost of franchise at January 1, 2019:
    Down payment$25,000
    Present value of installments$43,700
     Initial amount capitalized$68,700
Less: Amortization of franchise for 2019 (1)$6,870
     Franchise balance on December 31, 2019$61,830

Table (2)

Schedule 2:

Calculate the value of patent.

ParticularsAmount
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.

ParticularsAmount
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
    Balance on July 1, 201944,000
Less: Amortization expense from July 1, 2019 to December 31, 2019 (5)$1,294
    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.

Amortization expense = Initial amount capitalizedEconomic useful life=$68,70010 years=$6,870

Working note (2):

Calculate the amortization of patent for 2019.

Amortization expense = (Capitalized cost of patent) Useful life=$16,4008 years=$2,050

Working note (3):

Calculate the amortization expense of trademark from July 1, 2016 to December 31, 2018

2.

To determine

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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