Question

1. On January 1, 2020, Cao signed an agreement to operate as a franchisee of ATK Ltd. for an initial franchise fee of $150,000. Of this amount, $30,000 was paid when the agreement was signed, and the balance is payable in 6 annual payments of$20,000 each, beginning January 1, 2021. The agreement provides that the down payment is not refundable and no future services are required of the franchisor. The present value at January 1, 2020, of the 6 annual payments discounted at 12%(the implicit rate for a loan of this type) is $82,228. The agreement also provides that 8% of the revenue from the franchise must be paid to the franchisor annually. Cao’s revenue from the franchise for 2020 was $600,000. Cao estimates the useful life of the franchise to be 12 years. (Hint: You may want to refer to Appendix 18A to determine the proper accounting treatment for the franchise fee and payments.)

2. Cao incurred $115,000 of experimental and development costs in its laboratory to develop a patent that was granted on July 1, 2020. Legal fees and other costs during 2020 associated with registration of the patent totaled $27,000. Expenditures for successful litigation in defense of the patent totaling $8,700 were paid on November 1, 2020. Cao estimates that the useful life of the patent will be 10 years.

3.  A trademark was purchased from Jian Company for $24,000 on January 1, 2017. Cao estimates that the useful life of the trademark will be 20 years from the date of acquisition

REQUIRED

1. What is the cost of the franchise on 1/1/20?

2. What is 2020 amorization of the franchise?

3. What is the cost of the patent on 1/1/20?

4. What is the total amortization expense for the patent in 2020?

5. What is the total amortization of the Trademark for the years 2017 through 2020?

6. What is the amount for total intangibles, net of amortization at December 31, 2020?

7. What is the amount of research and development expenses in connection with the patent incurred in 2020?

8. What is the amount of interest expense incurred on the franchise loan incurred in 2020?

9. What is the franchise expenses on revenue incurred in 2020?

10. What is the amount of Trademark amortization in 2020?

Answer 1

Dear student, we cannot able to post solution more than four sub-parts of the question as per our policy.

What is the cost of the franchise on 1/1/20?
Amount paid when the agreement was signed	$          30,000
Add: Present value at January 1, 2020, of the 6 annual payments discounted at 12%	$          82,228
Cost of the franchise on 1/1/20	$        112,228
What is 2020 amorization of the franchise?
Cost of the franchise on 1/1/20	$        112,228
Divided by: useful life of the franchise	12
Amortization of the franchise	$            9,352
What is the cost of the patent on 7/1/20?
Experimental and development costs in its laboratory to develop should not be capitalized.
Legal fees and other costs associated with registration of the patent	$                   -
Cost of the patent on July 1, 2020	$          27,000
What is the total amortization expense for the patent in 2020?
Cost of the patent on July 1, 2020	$          27,000
Divided by: useful life of the patent	20
Annual amortization	$            1,350
Cost of the patent on July 1, 2020	$          27,000
Less: Amortization for 4 months [July to October] (1350*4/12)	$                450
Add: Expenditures for successful litigation in defense of the patent	$            8,700
Cost of the patent on November 1	$          35,250
Divided by: useful life of the patent in months (10 years = 120 months) (120-4 months = 116)	116
Monthly amortization on or after November 1.	$                304
Amortization for 2 months [November and December] (304*2)	$                608
Amortization for 4 months [July to October]	$                450
Amortization for 2 months [November and December]	$                608
Total amortization expense for the patent in 2020	$            1,058