Exercise 12-4 Presented below is selected information for Carla Vista Company. 1. Carla Vista purchased a patent from Vania Co. for 51,180,000 on January 1, 2015. The patent is being amortized over its remaining legal life of 10 years, expiring on January 1, 2025. During 2017, Carla Vista 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? The amount to be reported 2. Carla Vista bought a franchise from Alexander Co. on January 1, 2016, for $340,000. The carrying amount of the franchise on Alexander\'s books on January 1, 2016, was $490,000. The franchise agreement had n estimated useful life of 30 years. Because Carla Vista 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? The amount to be amortized 3. On January 1, 2017, Carla Vista incurred organization costs of $270,000. What amount of organization expense should be reported in 2017? The amount to be red 4. Carla Vista purchased the license for distribution of a popular consumer product on January 1, 2017, for $148,000. 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, Carla Vista can renew the license indefinitely for successive 5-year terms. What amount should be amortized for the year ended December 31, 2017? The amount to be amortized
1. Amount to be reported = $708000
Computation:
Amortization for 2015 and 2016 = Cost / Useful life * Years completed = ($1180000/10) x 2 = $236000
Amortization for year 2017 = (Cost - Amount Amortized) / (Revised life - years completed)
Amortization for year 2017 = ($1180000 – $236,000) ÷ (6 – 2) = $236000
Accumulated amortization 12/31/17: $236000 + $236000 = $472000
Amount to be reported = Cost - Accumulated Amortization = $1180000 - $472000 = $708000
2. Computation of Amount to be amortized = $34000
In this case Carla Vista will amortize the franchise over its full estimated useful life because it is uncertain if Carla Vista will be able to keep the franchise at the end of 2018. So, because of this uncertainty, the franchise should be amortized over 10 years. The amount of this amortization as of December 31, 2017 will be $340000 / 10 = $34,000
3. The amount of organization expense which should be reported in 2017 is $270000 because the expense should be expensed as they are incurred
4. The Amount of amortization cost is $0 or Zero. as the license has indefinite life and can be renewed at a nominal cost.
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