Question

Intangibles: Balance Sheet Presentation and Income Statement Effects Han Company has provided information on intangible assets as follows: 1. A patent was purchased from Lou Company for $1,560,000 on January 1, 2018. Han estimated the remaining useful life of the patent to be 15 years. The patent was carried in Lou's accounting records at a net book value of $1,310,000 when Lou sold it to Han. 2. During 2019, a franchise was purchased from Rink Company for $480,000. In addition, 5% of revenue from the franchise must be paid to Rink. Revenue from the franchise for 2019 was $1,600,000. Han estimates the useful life of the franchise to be 5 years and takes a full year's amortization in the year of purchase. 3. Han incurred R&D costs in 2019 as follows: Materials and equipment Personnel $139,000 160,000 69,000 $368,000 Indirect costs Han estimates that these costs will be recouped by December 31, 2020. 4. On January 1, 2019, Han estimates, based on new events, that the remaining life of the patent purchased on January 1, 2018, is only 10 years from January 1, 2019.

Answer 1

Solution

Han Company

1. Intangible Assets Section of Balance Sheet

Han Company
Balance Sheet (Intangible Assets Section)
As on December 31, 2019
Patent, net (Schedule 1)	$1,310,400
Franchise from Rink Company, net (Schedule 2)	$384,000
Intangible Assets	$1,694,400

Schedule 1 –

Calculation of net value of the patent:

Purchase cost of the patent on January 1, 2018 -       $1,560,000

Estimated remaining useful life of the patent = 15 years

Amortization expense for 2018 = 1,560,000/15 = $104,000

Patent net value at January 1, 2019 = $1560,000 – 104,000 = $1,456,000

Re-estimated remaining life of the patent from January 1, 2019 = 10 years

Amortization expense for 2019 = net value/remaining life

= 1,456,000/10 = $145,600

Net value of patent at December 31, 2019 = 1,456,000 – 145,600 = $1,310,400

Accumulated Amortization at December 31, 2019 = 104,000 + 145,600 = $249,600

Schedule 2 –

Calculation of the net value of the franchise:

Cost of franchise at date of purchase in 2019 = $480,000

Useful life of franchise – 5 years

Amortization expense = 480,000/5 = $96,000

Net value of the franchise at December 31, 2019 = $480,000 – 96,000 = $384,000

Accumulated amortization – franchise at December 31, 2019 = $96,000

2. Schedule showing the income statement effects for the year ended December 31, 2019:

Han Company
Income Statement Effects
For the year Ended December 31, 2019
Patent from Lou Company
Amortization Expense	$145,600	$145,600
Franchise from Rink Company:
Amortization expense	$96,000
Franchise fees expense	$80,000	$176,000
Research and development expense		$368,000
Total Expenses		$689,600

Note: the amortization expense of patent related to the year 2018, $104,000 would be recorded in the income statement for 2018 and hence not included in the income statement for 2019. Current year patent amortization expense of $145,600 is included in the income statement for the year ended December 31, 2019.

Franchise fees expense = 5% of franchise revenue

= 5% x 1,600,000 = $80,000

The entire research and development expense is accounted for in the year incurred and hence $368,000 is included in the income statement for 2019.