Question

Presented below is selected information for Sheridan Company.

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

1. Sheridan purchased a patent from Vania Co. for $1,160,000 on January 1, 2018. The patent is being amortized over its remaining legal life of 10 years, expiring on January 1, 2028. During 2020, Sheridan 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. Sheridan bought a franchise from Alexander Co. on January 1, 2019, for $330,000. The carrying amount of the franchise on Alexander’s books on January 1, 2019, was $480,000. The franchise agreement had an estimated useful life of 30 years. Because Sheridan 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, Sheridan incurred organization costs of $265,000. What amount of organization expense should be reported in 2020?

The amount to be reported

$enter the dollar amount to be reported

4. Sheridan purchased the license for distribution of a popular consumer product on January 1, 2020, for $146,000. 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, Sheridan 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

Click if you would like to Show Work for this question:

Open Show Work

Answer 1

Answer of Point 1 :-

Value as on 1 January 2018 = 1160000, Life = 10 Years,

Amortization Value per Year = 1160000/10 = 116000

Value as 01 January 2019 = 1160000 - 116000 = 1044000

value as 01 January 2020 = 1044000 - 116000 = 928000.

But now it is mentioned that life is 6 year from the date of acquisition and as on January 2020 remaining life from the date of acquisition is 4 Years hence assets will be writte off in 4 Years as per the GAAP Rules. Hence new amortisation for the remaining life of assets is 928000/4 = 232000 and value as on 31.12.2020 is = 928000 - 232000 = 696000 only.

Answer of Point 2 :-

Sheridan has purchase the asset in value of 330000 for 30 Years but as per the question frenchisy will be remained upto 2028 only hence economic life of asset is 9 Years i.e. from 2019 to 2028. Hence amortisation value per year is = 330000/9 = 36666.67. (As per GAAP Rules)

Now value after 2 years i.e. 31.12.2020 will be = 330000 - 36666.67 (for year 2019) - 36666.67 ( for the year 2020) = 256666.67

Answer of Point 3 :-

Organisation cost incurred on 1 jan 2020 of Rs. 265000 and same to be amortise till the date of franchisy life i,e, 9 Years from 1 jan 2020. Organisation expenses for the Year 2020 will be = 265000/9 = 29444.44

Answer of Point 4 :-

as per GAAP Rules " Assets with indefinite lives and goodwill are not amortized but are tested for impairment."

Hence the cost of license with indefinite life for cash flow will not be amortised and value of amortisation will be zero.