Exercise 12-4 Presented below is selected information for Blossom Company. Answe
ID: 2430362 • Letter: E
Question
Exercise 12-4
Presented below is selected information for Blossom Company.
Answer the questions asked about each of the factual situations.
1. Blossom purchased a patent from Vania Co. for $1,210,000 on January 1, 2015. The patent is being amortized over its remaining legal life of 10 years, expiring on January 1, 2025. During 2017, Blossom determined that the economic benefits of the patent would not last longer than 6 years from the date of acquisition. What amount should be reported in the balance sheet for the patent, net of accumulated amortization, at December 31, 2017?
2. Blossom bought a franchise from Alexander Co. on January 1, 2016, for $355,000. The carrying amount of the franchise on Alexander’s books on January 1, 2016, was $505,000. The franchise agreement had an estimated useful life of 30 years. Because Blossom must enter a competitive bidding at the end of 2018, it is unlikely that the franchise will be retained beyond 2025. What amount should be amortized for the year ended December 31, 2017?
3. On January 1, 2017, Blossom incurred organization costs of $277,500. What amount of organization expense should be reported in 2017?
4. Blossom purchased the license for distribution of a popular consumer product on January 1, 2017, for $151,000. It is expected that this product will generate cash flows for an indefinite period of time. The license has an initial term of 5 years but by paying a nominal fee, Blossom can renew the license indefinitely for successive 5-year terms. What amount should be amortized for the year ended December 31, 2017?
Explanation / Answer
Solution 1:
Amortization for 2015 & 2016 = ($1,210,000/10) * 2 = $242,000
2017 amortization = ($1,210,000 - $242,000) / (6 - 2) = $242,000
Accumulated amortization for December 31, 2017 = $242,000 + $242,000 = $484,000
On the December 31, 2008 balance sheet, Blossom will report the patent of $726,000 ($484,000 net of accumulated amortization).
Solution 2:
In this case Blossom will amortize the franchise over its full estimated useful life because it is uncertain if Blossom will be able to keep the franchise at the end of 2025. So, because of this uncertainty, the franchise should be amortized over 10 years.
Amortization expense for year ended 2017 = $355,000 / 10 = $35,500
Solution 3:
The amount of organization expense which should be reported in 2017 is $277,500 because the expense should be expensed as they are incurred.
Solution 4:
As license can renewed, at nominal costs, it is considered to have an indefinite life. Because of this no amortization will be recorded at this time. However, Blossoms will need to test the license for impairment in future periods.
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