Question

P9.7 (LO 4, 5) The intangible assets section of Glover Restaurants at December 31, 2019, is presented below.

Patents (£ 60,000 cost less £ 6,000 amortization)   £54,000

Franchises (£ 48,000 cost less £ 19,200 amortization)  28,800

Total £82,800

The patent was acquired in January 2019 and has a useful life of 10 years. The franchise was acquired in January 2016 and also has a useful life of 10 years. The following cash transactions may have affected intangible assets during 2020.

Jan. 2 Paid £ 45,000 legal costs to successfully defend the patent against infringement by another company.

Jan.-June Developed a new product, incurring £ 100,000 in research costs and £ 68,000 in development costs prior to technological feasibility. A patent was granted for the product on July 1 . Its useful life is equal to its 20 -year legal life.

Sept. 1 Paid £ 58,000 to an extremely large defensive lineman to appear in commercials advertising the company's products. The commercials will air in September and October.

Oct. 1 Acquired a franchise for £ 100,000. The franchise has a useful life of 40 years.

Instructions

a. Prepare journal entries to record the transactions above.

b. Prepare journal entries to record the 2020 amortization expense.

c. Prepare the intangible assets section of the statement of financial position at December 31,2020 .

Answer 1

Concept :

1)Meaning of Intangible assets : An intangible asset is an identifiable non-monetary asset without physical substance 2) Recognition of Intangible Asset: An intangible asset shall be recognised if, and only if: (a) it is probable that the expected future economic benefits that are attributable to the asset will flow to the entity; and (b) the cost of the asset can be measured reliably. An entity shall assess the probability of expected future economic benefits using reasonable and supportable assumptions that represent management's best estimate of the set of economic conditions that will exist over the useful life of the asset 3) Measurement of Intangible Assets: An intangible asset shall be measured initially at cost. Cost of Intangible Assets included Purchase Price and any directly attributable cost of preparing the asset for its intended use. 4) Treatment of Research and Development Expenses: a) Research expenses is recognised as an expense when incurred. b) Development Expenses recognised as an expense when incurred if it does not satisfy the criteria for recognition as an intangible asset. c) Development Expense is added to the carrying amount of Intangible assets Acquired Seperately if it satisfy the criteria for recognition as an intangible asset. d) Development Expenses in respect of Internally generated intangible asset shall be recognized as an intangible asset if and only if, an entity can demonstrate all of the following: (a) the technical feasibility of completing the intangible asset so that it will be available for use or sale. (b) its intention to complete the intangible asset and use or sell it. (c) its ability to use or sell the intangible asset. (d) how the intangible asset will generate probable future economic benefits. Among other things, the entity can demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset. 5) Treatment of other Expenses on Intangible assets: Expenditure on an intangible item shall be recognised as an expense when it is incurred unless: it forms part of the cost of an intangible asset that meets the recognition criteria CS Scanned with CamScanner

Solution:

Glover Restaurants Journal Entries For Transactions For the Year Ended 31 DEC, 2020 Amount in £ Credit Amount Debit Amount 45000 Date Particulars 02/01/2020 Legal Expense Cash (Being Legal Expenses incurred for Defending Patent against infringement by another company) 45000 Jan-Jun 2020 Research Expenses Development Expenss 100000 68000 Cash 168000 (Being Research and development Expenses incurred for a new product) 58000 01/09/2020 Advertisement Exp cash ( Being amount paid to large defensive lineman to appear in commercial advertising) 58000 100000 01/10/2020 Franchise cash (Being Amount paid for Acquiring Franchise) 100000 Glover Restaurants Journal Entries For Amortisation Expenses For the Year Ended 31 DEC, 2020 Amount In Date Particulars Debit Amount Credit Amount 31/12/2020 Amortisation Expenses 6000 Accumulated Amortisation 6000 (Being Amortisation Expense on Patents recognised) 5425 5425 31/12/2020 Amortisation Expenses Accumulated Amortisation (Being Amortisation Expense on Franchise recognised) 11425 31/12/2020 Accumulated Amortization Patents Franchise (Being Accoumulated Amortization charged to Patents and Franchise) 6000 5425 CS Scanned with CamScanner

Working Note 1: Calculation for Amortisation Expenses Amount in £ Particulars A) Patents Cost of Patents Acquired on January 2019 Useful Life Amortisation Per Year 60000 10 Years 6000 B) Franchise Cost of Franchise Acquired on January 2016 Useful Life Amortisation Per Year 48000 10 Years 4800 Cost og Franchise Acquired on Oct 2020 Useful Life Amortisation Per Year Amortisation For Oct, Nov and Dec 2020 Total Amortisation on Franchise to be recognised as Expense 100000 40 Years 2500 625 5425 AMOUNT IN E Glover Restaurants Extract of Statement of Financial Position As on 31 DEC, 2020 ASSETS Intangible Assets Patents £ 60000 less Accumulated Amortization £ 12000) Franchise (£ 148000 ess Accumulated Amortization £ 10225) Total Intangible Assets 48000 137775 185775 Working Note 2: Notes on Transactions 1) Legal cost incurred to successfully defend the patent against infringement by another Company treated as Revenue Expenditure as it does not meet asset recognition criteria of Intangible assets 2)Research and development cost incurred is treated revenue Expenditure as it is incurred prior to Technical Feasibility 3)Expenditure on Advertisement Treated as Revenue Expenditure as it does not meet asset recognition criteria of Intangible assets Scanned with CamScanner