E12-4B (L01,2,5) (Intangible Amortization) P resented below is selected informat

Question

E12-4B (L01,2,5) (Intangible Amortization) Presented below is selected information for Tartabull Company.

1.) Tartabull purchased a patent from Vania Co. for $3,000,000 on January 1, 2015. The patent is being amortized over its remaining legal life of 10 years, expiring on January 1, 2025. During 2017, Tartabull determined that the economic benefits of the patent would not last longer than 7 years from the date of acquisition. What amount should be reported in the bal- ance sheet for the patent, net of accumulated amortization, at December 31, 2017?

2.) Tartabull bought a franchise from Alexander Co. on January 1, 2016, for $900,000. The carrying amount of the franchise on Alexander’s books on January 1, 2016, was $600,000. The franchise agreement had an estimated useful life of 20 years. Because Tartabull must enter a competitive bidding at the end of 2025, 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, Tartabull incurred organization costs of $500,000. What amount of organization expense should be reported in 2017?

4.) Tartabull purchased the license for distribution of a popular consumer product on January 1, 2017, for $400,000. 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, Tartabull can renew the license indefinitely for successive 5-year terms. What amount should be amortized for the year ended December 31, 2017?

Instructions

Answer the questions asked about each of the situations.

Explanation / Answer

1 01/01/2015 Value of Patent $3,000,000 Legal Life 10 Years Amortization Amount ($3000000/10) $300,000 Amortization Amount for 2 years (i.e. from 01-01-2015 to 31-12-2016) $600,000 01/01/2017 Value of Patent ($3000000-$600000) $2,400,000 As Companies should Amortize the cost over its cost of Life or over Its Useful life whichever is shorter In the Given Case the shorter period is Useful life i.e. 7 Years So It Should be Amortized with in 7 Years The remaining Life as on 01-01-2017 considering the Useful life(7-2 years) 5 Years Amortization Amount ($2400000/5) $480,000 31/12/2017 Value of Patent ($2400000-$480000) $1,920,000 31/12/2017 Total Amortization Cost $1,080,000 2 01/01/2016 Original Value of Franchise $900,000 01/01/2016 Carrying Value of Franchise $600,000 Estimated Usefullife 20 years Expected Life of frnachise from 01-01-16 (At the end of 2025) 10 Years A Company should amortize the cost of Franchise over the Life of Franchise In the Given case it should be amortized over 10 years from 01-01-2016 So the amount should be amortized for the year ended 2017($900000/10) $90,000 3 Organization Expenses should be expensed in the Same year in which it incurred So the Answer is $500,000 4 Purchase Price of License $400,000 Companies do not Amortize indefine-Life Intangibles As the License is an Indefinite intangible asset there is no need to Amortize any amount in the year ended 31-12-2017

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