Intangible Assets Account Titles and Explanation Debit Credit (To clear the Inta

Question

Intangible Assets Account Titles and Explanation Debit Credit (To clear the Intangible Assets) (To record current amount for Franchises) (To record current amount for Rents) (To record current amount for Patents) Intangible Assets 7/1/12
8-year franchise; expiration date 6/30/19
$51,600 10/1/12
Advance payment on laboratory space (2-year lease)
25,840 12/31/12
Net loss for 2011 including state incorporation fee, $1,070,



   and related legal fees of organizing, $4,660 (all fees incurred in 2011)
17,290 1/2/13
Patent purchased (10-year life)
81,790 3/1/13
Cost of developing a secret formula (indefinite life)
76,400 4/1/13
Goodwill purchased (indefinite life)
278,580 6/1/13
Legal fee for successful defense of patent purchased above
13,570 9/1/13
Research and development costs
159,800 Reichenbach Co., organized in 2011, has set up a single account for all intangible assets. The following summary discloses the debit entries that have been recorded during 2012 and 2013.

Explanation / Answer

7/1/12 8-year franchise; expiration date 6/30/19 $55,680

This is an intangible asset, and since it has a definite life, will be amortized.

10/1/12 Advance payment on laboratory space (2-year lease) 25,300

This is a period cost and 15 mths' worth of rent will be expensed, and 9 mths' rent is prepaid

12/31/12 Net loss for 2011 including state incorporation fee, $1,590,

and related legal fees of organizing, $5,310 (all fees incurred in 2011) 16,580

Losses should be taken to retained earnings.

1/2/13 Patent purchased (10-year life) 81,880

This is an intangible asset and will be amortized (8,188 per yr for 10 yrs)

3/1/13 Cost of developing a secret formula (indefinite life) 72,320

Generally, R&D expenditure should be expensed.

4/1/13 Goodwill purchased (indefinite life) 276,380

This is an intangible asset and should be tested for impairment annually but not amortized.

6/1/13 Legal fee for successful defense of patent purchased above 20,700

Successful defence can be capitalised to the patent account, and amortized accordingly

9/1/13 Research and development costs 164,700

This should be expensed off.

Prepare the necessary entries to clear the Intangible Assets account and to set up separate accounts for distinct types of intangibles.

December 31, 2013

Dr Franchise $46,400 (i.e. $55,680 - $9,280)

Dr Amortization expense - franchise 9,280 ($55,680/6 yrs)

Dr R&D expenses (lab rental) 15,812.50 (15 out of 24 mths)

Dr Prepaid rent $9,487.50 (9 out of 24 mths)

Dr Retained earnings 16,580

Dr Patents 92,322 [102,580 - 102,580/10 (i.e. $81,880 + 20,700)]

Dr Amortization expense - patents 10,258

Dr R&D expenses 72,320 (you can add this to line 3 above)

Dr Goodwill 276,380

Dr R&D expenses 164,700 (you can add this to line 3 above as well)

Cr Intangible assets $713,540

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