Question

Exercise 12-04

Presented below is selected information for Pharoah Company.

Answer the questions asked about each of the factual situations. (Do not leave any answer field blank. Enter 0 for amounts.)

1. Pharoah purchased a patent from Vania Co. for $1,260,000 on January 1, 2018. The patent is being amortized over its remaining legal life of 10 years, expiring on January 1, 2028. During 2020, Pharoah determined that the economic benefits of the patent would not last longer than 6 years from the date of acquisition. What amount should be reported in the balance sheet for the patent, net of accumulated amortization, at December 31, 2020?

The amount to be reported

$enter the dollar amount to be reported

2. Pharoah bought a franchise from Alexander Co. on January 1, 2019, for $380,000. The carrying amount of the franchise on Alexander’s books on January 1, 2019, was $530,000. The franchise agreement had an estimated useful life of 30 years. Because Pharoah must enter a competitive bidding at the end of 2021, it is unlikely that the franchise will be retained beyond 2028. What amount should be amortized for the year ended December 31, 2020?

The amount to be amortized

$enter the dollar amount to be amortized

3. On January 1, 2020, Pharoah incurred organization costs of $290,000. What amount of organization expense should be reported in 2020?

The amount to be reported

$enter the dollar amount to be reported

4. Pharoah purchased the license for distribution of a popular consumer product on January 1, 2020, for $156,000. It is expected that this product will generate cash flows for an indefinite period of time. The license has an initial term of 5 years but by paying a nominal fee, Pharoah can renew the license indefinitely for successive 5-year terms. What amount should be amortized for the year ended December 31, 2020?

The amount to be amortized

$enter the dollar amount to be amortized

Answer 1

SOLUTION

1.

Particulars	Amount ($)
Cost of patent	1,260,000
Less: Amortization in 2018 (1,260,000/10 years)	126,000
Less: Amortization in 2019 (1,260,000/10 years)	126,000
Book value of Patent on Jan. 1 2020	1,008,000
Less: Amortization in 2020 (Revised life is 6 years, so remaining is 4 years) (1,008,000/4)	252,000
Amount to be reported on Dec. 31 2020	756,000

2. Amount to be amortized = Cost of franchise / Useful life

= $380,000 / 10 = $38,000

* As it is unlikely that the franchise will be retained beyond 2028 so it should be amortized over period of 10 years.

3. Amount to be reported = $290,000 as an expense.

4. License is expected to provide benefits for an infinite period, so no amortization shall be recorded.

Amount to be amortized = 0