Exercise 12-8 (Part Level Submission) Cullumber Company has provided information

Question

Exercise 12-8 (Part Level Submission) Cullumber Company has provided information on intangible assets as follows. A patent was purchased from Ford Company for $2,501,000 on January 1, 2016. Cullumber estimated the remaining useful life of the patent to be 10 years. The patent was carried in Ford's accounting records at a net book value of $1,968,000 when Ford sold it to Cullumber. During 2017, a franchise was purchased from Polo Company for $505,000. In addition, 7% of revenue frotn the franchise must be paid to Polo. Revenue from the franchise for 2017 was $2,456,000. Cullumber estimates the useful life of the franchise to be 10 years and takes a full year's amortization in the year of purchase. Cullumber incurred research and development costs in 2017 as follows Materials and equipment $139,600 193,600 102,800 $436,000 Personnel Indirect costs Cullumber estimates that these costs will be recouped by December 31, 2020, The materials and equipment purchased have no alternative uses. On January 1, 2017, because of recent events in the field, Cullumber estimates that the remaining life of the patent purchased on January 1, 2016, is only 5 years from January 1, 2017

Explanation / Answer

Patents are the technology related intangible assets which gives the holder exclusive right to use, manufacture or sell a product or process.

Cullumber Company purchased a patent from Ford on January 1, 2016 for $2,501,000. Purchased price of the patent will be capitalized in full in the year of purchase. Amortization of patent is done on the basis of useful life or legal life of asset (whichever is lower) Now Useful life of asset is 10 years so the asset will be amortized in 10 years. Also the residual value of patent is Nil.

Amortization for 2016 is calculated as under:

During 2017 Franchise purchased at $505,000 and the useful life of franchise is 10 years.

Research and Development cost incurred in 2017 will be expensed in the year itself. So, cost of $436,000 will be expensed in 2017.

(a)

Intangible section schedule is shown as under:

(b)

Income Statement section is as shown below:

Particulars Amount ($) Asset Value 2,501,000 Years of amortization 10 Yearly amortization 250,100 Amortization 2016 250,100 Carrying value as of December 31, 2016 2,250,900 Years of amortization 5 Yearly amortization 450,180 Amortization 2017 450,180 Carrying value as of December 31, 2017 1,800,720

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