Question

Exercise 12-8 Sunland Company has provided information on intangible assets as follows. A patent was purchased from Ford Company for $2,506,000 on January 1, 2016. Sunland estimated the remaining useful life of the patent to be 10 years. The patent was carried in Ford’s accounting records at a net book value of $1,968,000 when Ford sold it to Sunland. During 2017, a franchise was purchased from Polo Company for $530,000. In addition, 4% of revenue from the franchise must be paid to Polo. Revenue from the franchise for 2017 was $2,431,000. Sunland estimates the useful life of the franchise to be 10 years and takes a full year’s amortization in the year of purchase. Sunland incurred research and development costs in 2017 as follows. Materials and equipment $143,100 Personnel 186,700 Indirect costs 107,300 $437,100 Sunland estimates that these costs will be recouped by December 31, 2020. The materials and equipment purchased have no alternative uses. On January 1, 2017, because of recent events in the field, Sunland estimates that the remaining life of the patent purchased on January 1, 2016, is only 5 years from January 1, 2017. Prepare the intangibles section of Sunland’s balance sheet at December 31, 2017. (Enter account name only and do not provide descriptive information.)

Prepare the income statement effect (related to expenses) for the year ended December 31, 2017, as a result of the facts above. (Enter account name only and do not provide descriptive information.)

Answer 1

ANSWER

Patent Ford Balance

Cost in 2016 = $2,506,000

Amortization for 2016 = 250,600 (2,506,000 / 10 years)}

Book Value on Jan 1 2017 = $2,255,400 {2,506,000 – 250,600)

As it is mentioned that the life is decreased to 5 years, so

Amortization for 2017 = $2,255,400 / 5 Years

Amortization for 2017 = $451,080

Value of Patent on 31 Dec 2017 = $2,255,400 - $451,080

Value of Patent on 31 Dec 2017 = $1,804,320

Franchise

Cost in 2017 = $530,000

Life = 10 Years

Amortization for 2017 = $53,000 (530,000 / 10 Years)

Value of Franchise on 31 Dec 2017 = $530,000 – 53,000

Value of Franchise on 31 Dec 2017 = $477,000

Intangible Assets
Patent Ford Balance	1,804,320
Franchise Balance	477,000
Total Intangibles Assets	2,281,320

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Sunland company intengible section
cost of patent				$ 25,06,000.00
less: amortization(2506000/10yr)				$    2,50,600.00
balance				$ 22,55,400.00
less: amortization of patent (2255400/5yr)				$    4,51,080.00
patent					$ 18,04,320.00
cost of franchise				$    5,30,000.00
less: amortize (530000/10yr)				$       53,000.00
balance of franchise					$    4,77,000.00
total intengible assets					$ 22,81,320.00
sunland company income statement effect
patent from ford company
amortization of patent 2017 (2255400/5yrs)					$    4,51,080.00
amortization of franchise ford (530000/10yr)				$       53,000.00
payment made to polo co 2431000*4%				$       97,240.00	$    1,50,240.00
research & development cost					$    4,37,100.00
total effect on income statement					$ 10,38,420.00

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