Patent Amortization Schedule

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					Solutions Guide: Please reword the answers to essay type parts so as to guarantee
that your answer is an original. Do not submit as is

P12-3 (Accounting for Franchise, Patents, and Trade Name) Information concerning
Haerhpin Corporation’s intangible assets is as follows. 1. On January 1, 2007, Haerhpin
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, beginning
January 1, 2008. The agreement provides that the down payment is not refundable and no
future services are required of the franchisor. The present value at January 1, 2007, 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. Haerhpin’s revenue from the franchise for 2007 was $950,000.
Haerhpin estimates the useful life of the franchise to be 10 years. (Hint: You may want to
refer to Appendix 18A to determine the proper accounting treatment for the franchise fee
and payments.) 2. Haerhpin incurred $65,000 of experimental and development costs in
its laboratory to develop a patent that was granted on January 2, 2007. Legal fees and
other costs associated with registration of the patent totaled $13,600. Haerhpin estimates
that the useful life of the patent will be 8 years. 3. A trademark was purchased from
Shanghai Company for $32,000 on July 1, 2004. Expenditures for successful litigation in
defense of the trademark totaling $8,160 were paid on July 1, 2007. Haerhpin estimates
that the useful life of the trademark will be 20 years from the date of acquisition.
Instructions (a) Prepare a schedule showing the intangible assets section of Haerhpin’s
balance sheet at December 31, 2007. Show supporting computations in good form. (b)
Prepare a schedule showing all expenses resulting from the transactions that would
appear on Haerhpin’s income statement for the year ended December 31, 2007. Show
supporting computations in good form.

(a)                       Haerhpin Corporation
                                Intangible Assets
                               December 31, 2002
Franchise, net of accumulated amortization of $5,870
 (Schedule 1)                                                                                  $52,830
Patent, net of accumulated amortization of $1,700
 (Schedule 2)                                                                                   11,900
Trademark, net of accumulated amortization of $5,840
 (Schedule 3)                                                                                   34,320
     Total intangible assets                                                                   $99,050

Schedule 1               Franchise
Cost of franchise on 1/1/02 ($15,000 + $43,700)                                                $58,700
2002 amortization ($58,700 X 1/10)                                                              (5,870)
      Cost of franchise, net of amortization                            $52,830

Schedule 2                 Patent
Cost of securing patent on 1/2/02                                       $13,600
2002 amortization ($13,600 X 1/8)                                        (1,700)
      Cost of patent, net of amortization                               $11,900

Schedule 3                Trademark
Cost of trademark on 7/1/99                                             $32,000
Amortization, 7/1/99 to 7/1/02 ($32,000 X 3/20)                          (4,800)
Book value on 7/1/02                                                     27,200
Cost of successful legal defense on 7/1/02                                8,160
Book value after legal defense                                           35,360
Amortization, 7/1/02 to 12/31/02 ($35,360 X 1/17 X 6/12)                 (1,040)
      Cost of trademark, net of amortization                            $34,320

(b)                        Haerhpin Corporation
         Expenses Resulting from Selected Intangible Assets Transactions
                     For the Year Ended December 31, 2002
Interest expense ($43,700 X 14%)                                         $ 6,118
Franchise amortization (Schedule 1)                                        5,870
Franchise fee ($950,000 X 5%)                                             47,500
Patent amortization (Schedule 2)                                           1,700
Trademark amortization (Schedule 4)                                        1,840
      Total intangible assets                                            $63,028

Note: The $65,000 of research and development costs incurred in
developing the patent would have been expensed per FASB No. 2 prior
to 2002.

Schedule 4        Trademark Amortization
Amortization, 1/1/02 to 6/30/02 ($32,000 X 1/20 X 6/12)                  $ 800
Amortization, 7/1/02 to 12/31/02 ($35,360 X 1/17 X 6/12)                  1,040
     Total trademark amortization                                        $1,840

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