Question

Intangibles: Balance Sheet Presentation and Income Statement Effects

Valen Company has provided information on intangible assets as follows:

1. A patent was purchased from the Lou Company for $1,410,000 on January 1, 2015. Valen estimated the remaining useful life of the patent to be 15 years. The patent was carried in Lou's accounting records at a net book value of $1,130,000 when Lou sold it to Barb.
2. During 2016, a franchise was purchased from Rink Company for $330,000. In addition, 5% of revenue from the franchise must be paid to Rink. Revenue from the franchise for 2016 was $1,800,000. Valen estimates the useful life of the franchise to be 5 years and takes a full year's amortization in the year of purchase.
3. Valen incurred R&D costs in 2016 as follows:

   Materials and equipment	$103,000
   Personnel	156,000
   Indirect costs	63,000
   	$322,000

   Valen estimates that these costs will be recouped by December 31, 2017.
4. On January 1, 2016, Valen estimates, based on new events, that the remaining life of the patent purchased on January 1, 2015, is only 10 years from January 1, 2016.

Required:

1. Prepare a schedule showing the intangibles section of Valen's balance sheet at December 31, 2016.

Valen Company
Intangible Assets Section of Balance Sheet
December 31, 2016
Patent, net (Schedule 1)	$
Franchise from Rink Company, net (Schedule 2)
Intangible assets	$
Schedule 1: Computation of Patent from Lou Company
Cost of patent at date of purchase	$
Amortization of patent for 2015
	$
Amortization of patent for 2016
Patent balance	$
Schedule 2: Computation of Franchise from Rink Company
Cost of franchise at date of purchase	$
Amortization of franchise for 2016
Franchise balance	$

Feedback

2. Prepare a schedule showing the income statement effects for the year ended December 31, 2016, as a result of the previously mentioned facts.

Valen Company
Income Statement Effects
For the Year Ended December 31, 2016
Patent from Lou Company:
		$
Franchise from Rink Company:
	$
Total expenses		$

Answer 1

Answer
1. Intangible assets section:
Name of Asset	Gross Value (01 Jan 2016)	Additions	Amortization	Net Value (31 Dec 2016)
Patent	13,16,000	0	1,88,000	11,28,000
Franchise	.	3,30,000	66,000	2,64,000
i. In case of patent, as on 31 Dec 2016, expected life is 10 years i.e. total life is 6 years from 01 Jan 2015. Amortization for 2 years should have been $ 1,410,000 / 6 * 2 = $ 470000. In 2015, amortization would be 1,410000 / 10 = $ 141000. The additional amortization of $ 330,000 is charged in 2016.
ii. In case of franchise, 5 % of revenue which is to be paid is not to be capitalized as it is a subsequent expenditure and does not provide incremental advantage.
2. Income statement effects for the year ended December 31, 2016:
Description	Amount ($)
1. Amortization for 2016	2,54,000
2. 5 % revenue of franchise	90,000
3. R&D Costs	3,22,000
R&D Costs is not capitalized as it does not have future economic benefits which means it does not have characteristics of an asset.