Question

E12.8 (L01, 2,5) (Acco LO 1, 2,5) (Accounting for Patents, Franchises, and R&D) Carter Company has provided information on intangible assets as follows. patent was purchased from Ford Company for $2,000,000 on January 1, 2019. Carter estimated the ning useful life of the patent to be 10 years. The patent was carried in Ford's accounting records at a net book value of $2,000,000 when Ford sold it to Carter During 2020, a franchise was purchased from Polo Company for $480,000. In addition, 5 of reve rom the franchise must be paid to Polo Revenue from the franchise for 2020 was $2.500,000. Carter estimates the useful life of the franchise in the lovers and takes a full year's amortization in the year of purchase

Answer 1

Prepare the intangible asset section of balance sheet of as on December 31, 2020: "C" Company Balance sheet (Partial) as on December 31, 2020 Particualrs Amount Patent $1.440,000 Franchise $432.000 Total intangible assets $1,872,000 Therefore, the total amount of intangible asset is $1,872,000 Working notes: Determine the book value of patent on December 31, 2020: Book Value of patent = Cost of acquiring patent - Amortization expense = $1,800,000 - $360,000 = $1.440,000 Therefore, the book value of patent is $1,440,000

Determine the amortization expense per annum: Amortization expense = Book valu eof patent on Dec 31,2016 Amortization expense $1,800,000 = $360,000 Therefore, the amortization expense per annum is $360,000 Determine the book value of patent on December 31, 2019: Book Value of patent = Cost of acquiring patent - Amortization expense = $2,000,000 - $200.000 = $1,800,000 Therefore, the book value of patent is $1,800,000 Determine the amortization expense per annum for 2019: Cost of acquiring patent Amortization expense = . Useful life of patent $2.000.000 10 = $200,000 Therefore, the amortization expense per annum is $200,000

Determine the book value of franchise on December 31, 2020: Book Value of patent = Cost of acquiring patent - Amortization expense = $480,000 - $48.000 = $432,000 Therefore, the book value of patent is $432,000 Determine the amortization expense per annum of franchise: Cost of acquiring Franchise Amortization expense = Useful life of franchise $480.000 10 = $48.000 Therefore, the amortization expense per annum is $200,000

b) Prepare the income statement of “C” company for the year ended December 31, 2020: "C" Company Income Statement (Partial) for the Year Ended December 31, 2020 Particulars Amount Amount Patent amortization $360,000 Franchise amortization $48,000 5% revenue paid to "P" company $125,000 $173,000 ($2,500,000x5%) Research and $433,000 development cost Total expenses $966,000 Therefore, the total amount of expenses is $966,000