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Intermediate Accounting: Reporting...

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

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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On June 30, 2019, your client, Sprauge Corporation, was granted two patents covering plastic cartons that it has been producing and marketing profitably for the past 3 years. One patent covers the manufacturing process, and the other covers the related products.

Sprauge executives tell you that these patents represent the most significant breakthroughs in the industry in the past 30 years. The products have been marketed under the registered trade-marks Safetainer, Duratainer, and Scalrite. Your client has already granted licenses under the patents to other manufacturers in the United States and abroad, and they are producing substantial royalties.

On July 1, Sprauge commenced patent infringement actions against several companies whose names you recognize as those of substantial and prominent competitors. Sprauge management is optimistic that these suits will result in a permanent injunction against the manufacture and sale of the infringing products and collection of damages for loss of profits caused by the alleged infringement. The financial vice president has suggested that the patents be recorded at the discounted value of expected net royalty receipts.

Required:

  1. 1. Explain the meaning of discounted value of expected net receipts.
  2. 2. How would such a value be calculated for net royalty receipts?
  3. 3. Explain the basis of valuation of Sprauge’s patents that would be generally accepted in accounting.
  4. 4. Assuming no practical problems of implementation and ignoring generally accepted accounting principles, explain the ideal basis of valuation for patents.
  5. 5. Explain what would be the preferable theoretical basis of amortization.
  6. 6. Explain what recognition, if any, the company should make of the infringement litigation in the financial statements for the year ending September 30, 2019.

1.

To determine

Describe the meaning of discounted value of expected net receipts.

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.

Time value of money: The time value is measured with the difference between an option’s current value and its intrinsic value. In other words, the value of money available at present is worth more in the future due to its potential earning capacity...

2.

To determine

Explain the manner in which the value of net royalty receipts would be calculated.

3.

To determine

State the basis in which the valuation of Company S’ patent would be treated under GAAP.

4.

To determine

Describe the ideal basis of valuation for patent; assume there is no practical problem of implementation and GAAP.

5.

To determine

Describe the preferable theoretical basis of amortization.

6.

To determine

Explain the recognition that should make of infringement litigation in the financial statement.

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