Question: (Accounting for Franchise, Patents, and Trademark) Information concerning Sandro Corporation’s intangible assets is as follows.

1. On January 1, 2017, 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 \(15,000 each, beginning January 1, 2018. The agreement provides that the down payment is not refundable and no future services are required of the franchisor. The present value at January 1, 2017, of the 4 annual payments discounted at 14% (the implicit rate for a loan of this type) is \)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 2017 was \(900,000. Sandro estimates the useful life of the franchise to be 10 years. (Hint: You may want to refer to Chapter 18 to determine the proper accounting treatment for the franchise fee and payments.)
2. Sandro incurred \)65,000 of experimental and development costs in its laboratory to develop a patent that was granted on January 2, 2017. 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, 2014. Expenditures for successful litigation in defense of the trademark totaling $10,200 were paid on July 1, 2017. Sandro estimates that the useful life of the trademark will be 20 years from the date of acquisition.

Instructions

1. Prepare a schedule showing the intangible assets section of Sandro’s balance sheet at December 31, 2017. Show supporting computations in good form.

Prepare a schedule showing all expenses resulting from the transactions that would appear on Sandro’s income statement for the year ended December 31, 2017. Show supporting computations in good form.

Step by step solution

01

Meaning of Trademark                                                                                                                  

Trademarks areintangible assets that are represented on the balance sheet at cost (or less). It might be anything as simple as a name or a logo. It legally distinguishes a product or service from all others of its sort and acknowledges the brand's ownership by the originating firm.

02

Preparing schedule showing intangible asset section of Sando’s balance sheet on December 31, 2017 (a)                                                                                                               

SANDRO CORPORATION Intangible Assets December 31, 2017
Franchise, net of accumulated amortization of $5,870 (Schedule 1)	$ 52,830
Patent, net of accumulated amortization of $2,200 Schedule 2)	15,400
Trademark, net of accumulated amortization of $6,600 (Schedule 3)	39,600
Total intangible assets	$107,830
Schedule 1 Franchise
Cost of the franchise on 1/1/17	$ 58,700
2017 amortization	(5,870)
Cost of the franchise, net of amortization	$ 52,830
Schedule 2 Patent
Cost of securing a patent on 1/2/17	$ 17,600
2017 amortization ($17,600 1/8)	(2,200)
Cost of patent, net of amortization	$ 15,400
Schedule 3 Trademark
Cost of the trademark on 7/1/14	$ 36,000
Amortization, 7/1/14 to 7/1/17 ($36,000 X 3/20)	(5,400)
Book value on 7/1/17	30,600
Cost of successful legal defense on 7/1/17	10,200
Book value after legal defense	40,800
Amortization from 7/1/17 to 12/31/17	(1,200)
Cost of trademark, net of amortization	$ 39,600

Working notes:

Calculation of Amortization value on 2017

$\begin{array}{rcl}\text{Amortization}& =& \frac{\text{Cost}\text{of}\text{franchise}}{\text{Useful}\text{life}}\\ & =& \frac{\$58,700}{10}\\ & =& \$5,870\\ & & \end{array}$

Calculation of Amortization value from 1/7/17 to 31/12/17

$\begin{array}{rcl}\text{Amortization}& =& \frac{\text{Book}\text{value}\text{after}\text{defense}}{\text{Useful}\text{life}}\times \text{Total}\text{month}\\ & =& \frac{\$40,800}{17}\times \frac{6}{12}\\ & =& \$1,200\\ & & \end{array}$

03

Preparing a schedule showing all expenses resulting from the transactions that would appear on Sandro’s income statement for the year ended December 31, 2017 (b)                                                                                                                   

SANDRO CORPORATION Expenses Resulting from Selected Intangible Assets Transactions For the Year Ended December 31, 2017
Interest expense	$ 6,118
Franchise amortization (Schedule 1)	5,870
Franchise fee ($900,000 X 5%)	45,000
Patent amortization (Schedule 2)	2,200
Trademark amortization (Schedule 4)	2,100
Total intangible assets	$61,288

Note: The $65,000 of research and development costs incurred in developing the patent would have been expensed prior to 2017.

Working notes:

Calculation of interest expense

$\begin{array}{rcl}\text{Interestexpense}& =& \text{Present}\text{value}\text{ofannual}\text{payments}\times \text{Discounted}\text{rate}\\ & =& \$43,700\times 14\%\\ & =& \$6,118\\ & & \end{array}$

Calculation of franchise fees

$\begin{array}{rcl}\text{Franchise}\text{fees}& =& \text{Revenue}\text{from}\text{franchise}\times \text{Revenue}\text{rate}\\ & =& \$900,000\times 5\%\\ & =& \$45,000\\ & & \end{array}$

Schedule 4 Trademark Amortization
Amortization, 1/1/17 to 6/30/17	$ 900
Amortization, 7/1/17 to 12/31/17	1,200
Total trademark amortization	$ 2,100

Working notes:

Calculation of amortization amount from 1/1/17 to 30/6/17

$\begin{array}{rcl}\text{Amortization}& =& \frac{\text{Trademark}}{\text{Useful}\text{life}}\times \text{Total}\text{month}\\ & =& \frac{\$36,000}{20}\times \frac{6}{12}\\ & =& \$900\\ & & \end{array}$

Calculation of amortization amount from 1/7/17 to 31/12/17

$\begin{array}{rcl}\text{Amortization}& =& \frac{\text{Book}\text{value}\text{after}\text{legal}\text{defence}}{\text{Useful}\text{life}}\times \text{Total}\text{month}\\ & =& \frac{\$36,000}{17}\times \frac{6}{12}\\ & =& \$1,200\\ & & \end{array}$

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