# accounting question help to solve?

(a)A company purchased a patent on January 1, 2008, for \$2,500,000. The patent's legal life is 20 years but the company estimates that the patent's useful life will only be 5 years from the date of acquisition. On June 30, 2008, the company paid legal costs of \$162,000 in successfully defending the patent in an infringement suit. Prepare the journal entry to amortize the patent at year end on December 31, 2008.

(b)Walker Company purchased a franchise from the Tasty Food Company for \$400,000 on January 1, 2008. The franchise is for an indefinite time period and gives Walker Company the exclusive rights to sell Tasty Wings in a particular territory. Prepare the journal entry to record the acquisition of the franchise and any necessary adjusting entry at year end on December 31, 2008.

(c)Chernomyrdin Company incurred research costs of \$200,000 and successful development costs of \$500,000 in 2008 in developing a new product that the company was able to patent. The company expects the product to be useful for 10 years. Prepare the necessary journal entries during 2008 to record these events and any adjustments at year end on December 31, 2008

5 years ago - 1 answers

(a) A company purchased a patent on January 1, 2008, for \$2,500,000. The patent's legal life is 20 years but the company estimates that the patent's useful life will only be 5 years from the date of acquisition. On June 30, 2008, the company paid legal costs of \$162,000 in successfully defending the patent in an infringement suit. Prepare the journal entry to amortize the patent at year end on December 31, 2008
The patent cost should be amortized over the useful or legal life, whichever is the shorter, in this case, 5 yrs from January 1, 2008. If legal costs are incurred to defend the patent rights, those costs are capitalized as an asset if the defense of the patent is successful. Since these costs (\$162,000) were incurred on June 30, 2008, this portion has 4.5 more yrs to go.
\$2,500,000/5 = \$500,000
\$162,000/4.5 = 36,000
Dr Patent amortization expense \$536,000
Cr Accumulated patent amortization \$536,000

(b) Walker Company purchased a franchise from the Tasty Food Company for \$400,000 on January 1, 2008. The franchise is for an indefinite time period and gives Walker Company the exclusive rights to sell Tasty Wings in a particular territory. Prepare the journal entry to record the acquisition of the franchise and any necessary adjusting entry at year end on December 31, 2008
Dr Franchise \$400,000
Cr Cash \$400,000

The franchise is an indefinite-life intangible and therefore should not be amortized. However tests for impairment should be carried out at least annually.

(c) Chernomyrdin Company incurred research costs of \$200,000 successful costs of \$500,000 in 2008 in developing a new product that the company was able to patent. The company expects the product to be useful for 10 years. Prepare the necessary journal entries during 2008 to record these events and any adjustments at year end on December 31, 2008
Dr Research and development expenses \$700,000
Cr Cash \$700,000

(Under GAAP costs associated with the development of the patent MAY be carried as an asset on the balance sheet of the company. However the question did not specify the date of the granting of the patent. This makes it impossible to calculate the amortization, so it would appear that the answer is to not capitalise any of the R&D)

5 years ago