a. A patent was purchased from the Lou Company for $1,600,000 on January 1, 2016

Question

a. A patent was purchased from the Lou Company for $1,600,000 on January 1, 2016. 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 $530,000 when Lou sold it to Janes.

b. During 2018, a franchise was purchased from the Rink Company for $680,000. The contractual life of the franchise is 10 years and Janes records a full year of amortization in the year of purchase.

c. Janes incurred research and development costs in 2018 as follows:

  

  

d. Effective January 1, 2018, 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 2016 through 2018 to reflect the above information.
2. Prepare a schedule showing the intangible asset section of Janes’s December 31, 2018, balance sheet.

Materials and supplies $ 158,000 Personnel 198,000 Indirect costs 78,000 Total $ 434,000

Explanation / Answer

1.

Note: The change in estimate of the life of the patent is a change in an accounting estimate is accounted for prospectively by amortizing the remaining book value over the revised estimated life.

2.

Date General Journal Debit Credit Jan. 1, 2016 Patent 1600000 Cash/Accounts payable 1600000 (To record purchase of patent) Dec. 31, 2016 Amortization expense ($1600000/10) 160000 Patent 160000 (To record amortization expense) Dec. 31, 2017 Amortization expense 160000 Patent 160000 (To record amortization expense) 2018 Franchise 680000 Cash/Accounts payable 680000 (To record purchase of franchise) 2018 Research and development expense 434000 Cash/Accounts payable 434000 (To record research and development costs incurred) Dec. 31, 2018 Amortization expense [($1600000 - $320000)/5] 256000 Patent 256000 (To record amortization expense) Dec. 31, 2018 Amortization expense ($680000/10) 68000 Franchise 68000 (To record amortization expense)

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