Question: (Recording and Amortization of Intangibles) Marshall Company, organized in 2016, has set up a single account for all intangible assets. The following summary discloses the debit entries that have been recorded during 2017.

1/2/17	Purchased patent (8-year life)	\( 350,000
4/1/17	Purchase goodwill (indefinite life)	360,000
7/1/17	Purchased franchise with 10-year life; expiration date 7/1/27	450,000
8/1/17	Payment of copyright (5-year life)	156,000
9/1/17	Research and development costs	215,000
		\)1,531,000

Instructions

Prepare the necessary entries to clear the Intangible Assets account and to set up separate accounts for distinct types of intangibles. Make the entries as of December 31, 2017, recording any necessary amortization and reflecting all balances accurately as of that date. (Use straight-line amortization.)

Step by step solution

01

Meaning of Intangible Asset

Intangible assets are identified as non-monetary assets that have no physical existence, according to the International Financial Reporting Standards (IFRS). Intangible assets, like other assets, are intended to create future financial returns for the organization.

02

Preparing journal entries

Date	Particular	Debit ($)	Credit ($)
	Patents	350,000
	Goodwill	360,000
	Franchise	450,000
	Copyright	156,000
	Research and Development Expense	215,000
	Intangible Assets		1,531,000
	Amortization Expense	79,250
	Patents ($350,000/8)		43,750
	Franchise ($450,000/10 X 6/12)		22,500
	Copyright ($156,000/5 X 5/12).		13,000

Working Notes:

Calculation of the amount of patents

$$\begin{gathered} \text{Patentsamount=}\frac{Patents}{Yearlife} \\ =\frac{\$350,000}{8} \\ =\$43,750 \end{gathered}$$

Calculation of Franchise amount

$$\begin{gathered} \text{Franchiseamount=}\frac{Total\mathrm{Franchise}}{Yearlife}\text{×totalmonth} \\ =\frac{\$450,000}{10}\times \frac{6}{12} \\ =\$22,500 \end{gathered}$$

Calculation of Copyright amount

localid="1655496650448" $$\begin{gathered} \text{Copyrightamount=}\frac{Totalcopyright\mathrm{Franchise}}{Yearlife}\text{×totalmonth} \\ =\frac{\$156,000}{5}\times \frac{5}{12} \\ =\$13,000 \end{gathered}$$

03

Balancing Intangible assets

Balance of Intangible Assets as of December 31, 2017
Patents	$350,000-$43,750=$306,250
Goodwill	$360,000 (no amortization)
Franchise	$450,000-$22,500=$427,500
Copyright	$156,000-$13,000=$143,000

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