Question

Janes Company provided the following information on intangible assets:

1. A patent was purchased from the Lou Company for $1,400,000 on January 1, 2019. Janes estimated the remaining useful life of the patent to be 10 years. The patent was carried on Lou’s accounting records at a net book value of $490,000 when Lou sold it to Janes.
2. During 2021, a franchise was purchased from the Rink Company for $640,000. The contractual life of the franchise is 10 years and Janes records a full year of amortization in the year of purchase.
3. Janes incurred research and development costs in 2021 as follows:
   

Materials and supplies	$	154,000
Personnel		194,000
Indirect costs		74,000
Total	$	422,000

4. Effective January 1, 2021, based on new events that have occurred, Janes estimates that the remaining life of the patent purchased from Lou is only five more years.

Required:
1. Prepare the entries necessary for years 2019 through 2021 to reflect the above information.
2. Prepare a schedule showing the intangible asset section of Janes’s December 31, 2021, balance sheet.

7 journal entries

Answer 1

Requirement 1

         a. To record the purchase of a patent.

January 1, 2019

Patent............................................................................................. 1,400,000

     Cash.......................................................................................... 1,400,000

         To record amortization on the patent.

December 31, 2019 and 2020

Amortization expense ($1,400,000 ÷ 10 years)................................ 140,000

     Patent........................................................................................ 140,000

         b. To record the purchase of a franchise.

2021

Franchise........................................................................................ 640,000

     Cash.......................................................................................... 640,000

         c. To record research and development expenses.

2021

Research and development expense.............................................. 422,000

     Cash.......................................................................................... 422,000

         2021 Year-end adjusting entries

         Patent: To record amortization on the patent after change in useful life.

December 31, 2021

Amortization expense (determined below)................................... 224,000

     Patent........................................................................................ 224,000

Calculation of annual amortization after the estimate change:

                          ($ in thousands)

                                $1,400        Cost
               $140 Previous annual amortization ($1,400 ÷ 10 years)        
       × 2 years 280        Amortization to date (2019–2020)    
1,120 Unamortized cost (balance in the patent account)

                                  ÷  5        Estimated remaining life        
                                $224 New annual amortization       

         Franchise: To record amortization of franchise.

December 31, 2020

Amortization expense ($640,000 ÷ 10 years)................................ 64,000

     Franchise................................................................................... 64,000

Requirement 2

            Intangible assets:

            Patent                                      $896,000 [1]    

            Franchise 576,000 [2]   

              Total intangibles                    $1,472,000

            [1] $1,120,000 – 224,000

            [2] $640,000 – 64,000