Answer to Question #168871 in Accounting for TAGUPA

Question

The Barb Company has provided information on intangible assets as follows:

1. A patent was purchased from the Lou Company for $1,500,000 on January 1, 2006. Barb estimated the remaining useful life of the patent to be 10 years. The patent was carried in Lou’s accounting records at a net book value of $1,250,000 when Lou sold it to Barb.

2. During 2007, a franchise was purchased from the Rink Company for $500,000. In addition, 5% of revenue from the franchise must be paid to Rink. Revenue from the franchise for 2007 was $2,000,000. Barb estimates the useful life of the franchise to be 10 years and takes a full year’s amortization in the year of purchase.

3. Barb incurred research and development costs in 2007 as follows:

Materials and equipment ..... $120,000

Personnel .......... 140,000

Indirect costs ......... 60,000

$ 320,000

Barb estimates that these costs will be recouped by December 31, 2008.

4. On January 1, 2007 Barb, based on new events that have occurred in the field, estimates that the remaining life of the patent purchased on January 1, 2006 is only five years from January 1, 2007.

Answer 1

1.Debit investments in intangible assets credit settlements with suppliers - 1 500 000

Debit intangible assets credit investments in intangible assets - 1 500 000

loan amortisation of intangible assets accrued depreciation - 250 000 (1 500 000-1 250 000)

Debit other income and expenses credit intangible intangible - 1 250 000

Debit payments to customers credit other income and expenses - 1 250 000

2 .Debit Intangible assets received for use - 500 000

Debit payments to suppliers credit checking account - 100 000(5% of revenue from the franchise)

Debit deferred expenses credit settlements with suppliers credit - 600 000

Debit investments in intangible assets credit materials and equipment - 120 000

Debit investments in intangible assets credit settlements with the staff - 140 000

Debit investments in intangible assets credit Indirect costs - 60 000

Debit intangible assets credit investments in intangible assets - 320 000

4.

Debit investments in intangible assets credit settlements with suppliers - 1 500 000

Debit intangible assets credit investments in intangible assets - 1 500 000

loan amortisation of intangible assets accrued depreciation - 300 000 (1 500 000-1 200 000)

Debit other income and expenses credit intangible intangible - 1 200 000

Debit payments to customers credit other income and expenses - 1 200 000