Question

1. On January 1, 2020, Cao signed an agreement to operate as a franchisee of ATK Ltd. for an initial franchise fee of $150,000. of this amount, $30,000 was paid when the agreement was signed, and the balance is payable in 6 annual payments of$20,000 each, beginning January 1, 2021. The agreement provides that the down payment is not refundable and no future services are required of the franchisor. The present value at January 1, 2020, of the 6 annual payments discounted at 12%(the implicit rate for a loan of this type) is $82,228. The agreement also provides that 8% of the revenue from the franchise must be paid to the franchisor annually. Cao's revenue from the franchise for 2020 was $600,000. Cao estimates the useful life of the franchise to be 12 years. (Hint: You may want to refer to Appendix 18A to determine the proper accounting treatment for the franchise fee and payments.) 2. Cao incurred $115,000 of experimental and development costs in its laboratory to develop a patent that was granted on July 1, 2020. Legal fees and other costs during 2020 associated with registration of the patent totaled $27,000. Expenditures for successful litigation in defense of the patent totaling $8,700 were paid on November 1, 2020. Cao estimates that the useful life of the patent will be 10 years. 3. A trademark was purchased from Jian Company for $24,000 on January 1, 2017. Cao estimates that the useful life of the trademark will be 20 years from the date of acquisition REQUIRED (a) Prepare a schedule showing the intangible assets section of Cao's balance sheet at December 31, 2020. Show supporting computations in good form. (b) Prepare a schedule showing all expenses resulting from the transactions that would appear on Cao's income statement for the year ended December 31, 2020. Show supporting computations in good form.

Answer 1

Answer: (a)

Cao's Ltd

Balance Sheet (Extract)

(Extract relating to Intangible Assets)

as on December 31,2020

Particulars	Note No.	Amount (in $)
(1) Non Current Assets Intangible Assets	1	288,100

(b)

Cao's Ltd

Income Statement

for the year ended December 31,2020

Particulars	Note No.	Amount (in $)
Revenue From operations		600,000
Total Revenue		600,000
Expenses:
Amortization	2	27900
Other Expenses	3	56700
Total Expenses		84600

Notes to Accounts (Extract)

Note No.	Particulars	Amount (in $)	Amount (in $)
1.	Intangible Assets		288100
	Franchise	137500
	Patents	127800
	Trademarks	22800
2.	Amortization Expenses		27900
	Franchise	12500
	Patents	14200
	Trademarks	1200
3.	Other Expenses		56700
	Litigation of Patents	8700
	8% Franchise Fees	48000

Working Notes:

S.No.	Particulars	Amount (in $)	Amount (in $)
1.	Franchise Fees	150000
	Less: Amortization 12 Years	12500	137500
2.	Patents ($ 115000 + $ 27000)	142000
	Less: Amortization 10 Years	14200	127800
3.	Trademarks	24000
	Less: Amortization 20 years	1200	22800