Question

Exercise 12-8 Cullumber Company has provided information on intangible assets as follows. A patent was purchased from Ford Company for $2,358,000 on January 1, 2016. Cullumber estimated the remaining useful life of the patent to be 10 years. The patent was carried in Ford’s accounting records at a net book value of $1,919,000 when Ford sold it to Cullumber. During 2017, a franchise was purchased from Polo Company for $579,000. In addition, 4% of revenue from the franchise must be paid to Polo. Revenue from the franchise for 2017 was $2,671,000. Cullumber estimates the useful life of the franchise to be 10 years and takes a full year’s amortization in the year of purchase. Cullumber incurred research and development costs in 2017 as follows. Materials and equipment $147,000 Personnel 190,900 Indirect costs 105,400 $443,300 Cullumber estimates that these costs will be recouped by December 31, 2020. The materials and equipment purchased have no alternative uses. On January 1, 2017, because of recent events in the field, Cullumber estimates that the remaining life of the patent purchased on January 1, 2016, is only 5 years from January 1, 2017.

Prepare the intangibles section of Cullumber’s balance sheet at December 31, 2017. (Enter account name only and do not provide descriptive information.) CULLUMBER COMPANY Intangibles Section of Balance Sheet For the Month Ended December 31, 2017For the Year Ended December 31, 2017December 31, 2017 Current AssetsCurrent LiabilitiesIntangible AssetsLong-term InvestmentsLong-term LiabilitiesProperty, Plant and EquipmentStockholders' EquityTotal AssetsTotal Current AssetsTotal Current LiabilitiesTotal Intangible AssetsTotal LiabilitiesTotal Liabilities and Stockholders' EquityTotal Long-term InvestmentsTotal Long-term LiabilitiesTotal Property, Plant and EquipmentTotal Stockholders' Equity $ Current AssetsCurrent LiabilitiesIntangible AssetsLong-term InvestmentsLong-term LiabilitiesProperty, Plant and EquipmentStockholders' EquityTotal AssetsTotal Current AssetsTotal Current LiabilitiesTotal Intangible AssetsTotal LiabilitiesTotal Liabilities and Stockholders' EquityTotal Long-term InvestmentsTotal Long-term LiabilitiesTotal Property, Plant and EquipmentTotal Stockholders' Equity $ SHOW LIST OF ACCOUNTS LINK TO TEXT LINK TO TEXT

Prepare the income statement effect (related to expenses) for the year ended December 31, 2017, as a result of the facts above. (Enter account name only and do not provide descriptive information.) CULLUMBER COMPANY Income Statement Effect For the Month Ended December 31, 2017For the Year Ended December 31, 2017December 31, 2017 Franchise from Polo CompanyAmortization of patentPayment to Polo CompanyAmortization of franchiseResearch and development costsTotal charged against incomePatent from Ford Company :         Patent from Ford Company    Amortization of patent    Research and development costs    Franchise from Polo Company    Total charged against income    Amortization of franchise    Payment to Polo Company $ Amortization of patentPatent from Ford CompanyResearch and development costsPayment to Polo CompanyFranchise from Polo CompanyAmortization of franchiseTotal charged against income :         Patent from Ford Company    Payment to Polo Company    Research and development costs    Amortization of patent    Total charged against income    Franchise from Polo Company    Amortization of franchise $         Payment to Polo Company    Amortization of patent    Total charged against income    Amortization of franchise    Franchise from Polo Company    Patent from Ford Company    Research and development costs Total charged against incomeAmortization of patentPatent from Ford CompanyResearch and development costsFranchise from Polo CompanyAmortization of franchisePayment to Polo Company         Franchise from Polo Company    Amortization of franchise    Amortization of patent    Payment to Polo Company    Research and development costs    Total charged against income    Patent from Ford Company $ Click if you would like to Show Work for this question: Open Show Work

Answer 1

CULLUMBER COMPANY
Intangibles Section of Balance Sheet
December 31, 2017
Intangible Assets:
Patents	1697760
Franchise	521100
Total intangible assets $	2218860

CULLUMBER COMPANY
Income Statement Effect
For the Year Ended December 31, 2017
Patent from Ford Company:
Amortization of patent		424440
Franchise from Polo Company:
Amortization of franchise	57900
Payment to Polo Company (4% x $2671000)	106840
		164740
Research and development costs		443300
Total charged against income $		1032480

Working:

1	Purchase cost of patent	2358000
	Less: Amortization for 2016 ($2358000/10)	235800
		2122200
	Less: Amortization for 2017 ($2122200/5)	424440
	Balance in Patent, Dec. 31, 2017	1697760
2	Purchase cost of franchise	579000
	Less: Amortization for 2017 ($579000/10)	57900
	Balance in Franchise, Dec. 31, 2017	521100