(a) Tandem Industries purchased a patent on January 1, 2014, for $2,000,000. The

Question

(a) Tandem Industries purchased a patent on January 1, 2014, for $2,000,000. 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, 2014, the company paid legal costs of $135,000 in successfully defending the patent in an infringement suit. Prepare the journal entry to amortize the patent at year end on December 31, 2014.
(b)   Seminole Partners purchased a franchise from Unhealthy Food Company for $400,000 on January 1, 2014. The franchise is for an indefinite time period and gives Seminole Partners the exclusive rights to sell Unhealthy Chicken Wings in a particular territory. Record the journal entry to record the acquisition of the franchise and any necessary adjusting entry at year end on December 31, 2014.
(c)   Young Corporation incurred research and development costs of $500,000 in 2014 in developing a new product. Record the necessary journal entries during 2014 to record these events and any adjustments at year end on December 31, 2014.

Explanation / Answer

a. The cost of amortization of patent = $2000000/5 = $ 400000 (as the useful life of the patent is five years)

The legal cost will be written off in the same year in which it is incurred and will not be amortized over the life of asset.

So, journal entry for amortization of patent will be,

Patent written off Dr. $400000

To Patent $400000

for incurring of legal cost,

Legal Cost Dr. $135000

To Cash $135000

b. The intangible assets should be written off over the useful life of the asset. If the useful life is infinite, then the asset should be written off in 5 years. So, amount to be amortized every year over 5 years = 400000/5 = $20000

Journal entry for acquisition of franchise,

Franchise a/c Dr. $400000

To Cash $400000

For amortization,

Franchise written off Dr. $20000

To Franchise $20000

C. the cost of reaseach should be recorded in the year in which it is incurred. The cost of developement will be treated as intangible asset and will be amotized only if, an nterprise can demostrate the following:

1. the product is technically feasible to be completed

2. Company has the intention to complete the product

3. Company ha sthe ability to use and sell the product.

4. there is an output market for selling the intangible asset

5. There are proper resouces available to complete the product.

So, we are assuming the cost incurredin thequestion is research cost. So the same will be booked in the year in which it is incurred,

Journal entry:

Research & developement cost Dr. $500000

To Cash $500000

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