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Chapter 12: Q9BE. (page 638)

Question: Nieland Industries had one patent recorded on its books as of January 1, 2017. This patent had a book value of \(288,000 and a remaining useful life of 8 years. During 2017, Nieland incurred research and development costs of \)96,000 and brought a patent infringement suit against a competitor. On December 1, 2017, Nieland received the good news that its patent was valid and that its competitor could not use the process Nieland had patented. The company incurred $85,000 to defend this patent. At what amount should patent(s) be reported on the December 31, 2017, balance sheet, assuming monthly amortization of patents?

Short Answer

Expert verified

Patents should be reported at $336,000 on December 31, 2017 balance sheet (assuming monthly amortization of patents).

Step by step solution

01

Calculation

Carrying amount

Life in months

Amortization per Month

Months Amortization

Patent

$288,000

96

$3,000

12

Legal Costs

$85,000

85

$1,000

1


$373,000




Carrying amount $373,000


Less: Amortization of patent (12 X $3,000) (36,000)


Less: Legal costs amortization (1 X $1,000) (1,000)


Carrying amount $336,000

02

 Step2: Amortization of Patents

Patent amortization is a strategy used by businesses to spread the cost of patents (intangible property) over time. The method for calculating a patent's amortization is similar to that used to compute straight-line depreciation for other intangible assets.

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Most popular questions from this chapter

Merck and Johnson & Johnson

Question: Merck & Co., Inc. and Johnson & Johnson are two leading producers of healthcare products. Each has considerable assets, and each expends considerable funds each year toward the development of new products. The development of a new healthcare product is often very expensive, and risky. New products frequently must undergo considerable testing before approval for distribution to the public. For example, it took Johnson & Johnson 4 years and \(200 million to develop its 1-DAY ACUVUE contact lenses. Below are some basic data compiled from the financial statements of these two companies.

(all dollars in millions)

Johnson & Johnson

Merck

Total assets

\)53,317

\(42,573

Total revenue

47,348

22,939

Net income

8,509

5,813

Research and development expense

5,203

4,010

Intangible assets

11,842

2,765

Instructions

  1. What kinds of intangible assets might a healthcare products company have? Does the composition of these intangibles matter to investors—that is, would it be perceived differently if all of Merck’s intangibles were goodwill than if all of its intangibles were patents?
  2. Suppose the president of Merck has come to you for advice. He has noted that by eliminating research and development expenditures the company could have reported \)4 billion more in net income. He is frustrated because much of the research never results in a product, or the products take years to develop. He says shareholders are eager for higher returns, so he is considering eliminating research and development expenditures for at least a couple of years. What would you advise?
  3. The notes to Merck’s financial statements note that Merck has goodwill of $1.1 billion. Where does recorded goodwill come from? Is it necessarily a good thing to have a lot of goodwill on a company’s books?

Question: Indicate whether the following items are capitalized or expensed in the current year.

  1. Purchase cost of a patent from a competitor.
  2. Research costs.
  3. Development costs (after achieving economic viability).
  4. Organizational costs.
  5. Costs incurred internally to create goodwill.

Kenoly Corporation owns a patent that has a carrying amount of \(300,000. Kenoly expects future net cash flows from this patent to total \)210,000. The fair value of the patent is $110,000. Prepare Kenoly’s journal entry, if necessary, to record the loss on impairment.

What are the main distinctions between a traditional financial instrument and a derivative financial instrument?

Question: Briefly discuss the convergence efforts that are underway in the area of intangible assets.
See all solutions

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