P123 Accounting for Franchise Patents and Trademark Informat

P12-3 (Accounting for Franchise, Patents, and Trademark) Information concerning Sandro Corpora- tion\'s intangible assets is as follows On January 1, 2014, Sandro signed an agreement to operate as a franchisee of Hsian Copy Service, Inc. for an initial franchise fee of $75,000. Of this amount, $15,000 was paid when the agreement was signed and the balance is payable in 4 annual payments of $15,000 each, ment provides that the down payment is not refundable and no future services are required of the franchisor. The present value at January 1, 2014, of the 4 annual payments discounted at 14% (the implicit rate for a loan of this type) is $43,700. The agreement also provides that 5% of the revenue from the franchise must be paid to the franchisor annually. Sandro\'s revenue from the franchise for 2014 was $900,000. Sandro estimates the useful life of the franchise to be 10 years. (Hint: You may want to refer to Chapter 18 to determine the proper accounting treatment for the franchise fee and payments.) 1. beginning January 1, 2015. The agree- 2. Sandro incurred $65,000 of experimental and development costs in its laboratory to develop a pat- ent that was granted on January 2, 2014. Legal fees and other costs associated with registration of the patent totaled $17,600. Sandro estimates that the useful life of the patent will be 8 years 3. A trademark was purchased from Shanghai Company for $36,000 on July 1, 2011. Expenditures for successful litigation in defense of the trademark totaling $10,200 were paid on July 1, 2014. Sandro estimates that the useful life of the trademark will be 20 vears from the date of acquisition Instructions (a) Prepare a schedule showing the intangible assets section of Sandro\'s balance sheet at December 31 2014. Show supporting computations in good form (b) Prepare a schedule showing all expenses resulting from the transactions that would appear on Sandro\'s income statement for the year ended December 31, 2014. Show supporting computations in good form.

Solution

Sandro Corporation Franchise Patent Trademark(3 Years Amortization from( 1/7/2014 to 1/7/2017) Date 01-01-2014 02-01-2014 01-07-2011 Cost(A) $           58,700.00 $ 17,600.00 $                                36,000.00 Useful life(B) 10 8 20 Amortization(C )=(A)/(B) $              5,870.00 $    2,200.00 $36000*3/20=$5400 Book Value $           52,830.00 $ 15,400.00 $                                30,600.00 Cost of Successful legal defence $                                10,200.00 Book Value after legal defence $                                40,800.00 Amortization from 1/7/2014 to 31/12/2014 for 6 months 40800*1/17*6/12=$1200 Book Value after amortization $                                39,600.00 Sandro Corporation Intangible Assets December 31st 2014 Franchise,net of Amortization $           52,830.00 Patent,net of Amortization $           15,400.00 Trademark, net of Amortization $           39,600.00 Total $        1,07,830.00