Question

Comprehensive Information concerning Kerr Corporation's intangible assets is as follows: a. On January 1, 2019, Kerr signed an agreement to operate as a franchisee of Rapid Copy Service Inc. for an initial franchise fee of $78,000. Of this amount, $26,000 was paid when the agreement was signed, and the balance is payable in 4 annual payments of $13,000 each beginning January 1, 2020. The agreement provides that the down payment is not refundable and no future services are required of the franchisor. The present value at January 2, 2019, of the 4 annual payments discounted at 14% (the implicit rate for a loan of this type) is $37,900. The agreement also provides that 4% of the revenue from the franchise must be paid to the franchisor annually. Kerr's revenue from the franchise for 2019 was $930,000. Kerr estimates the useful life of the franchise to be 10 years. b. Kerr incurred $69,000 of experimental and development costs in its laboratory to develop a patent, which was granted on January 2, 2019. Legal fees and other costs associated with registration of the patent totaled $18,320. Kerr estimates that the useful life of the patent will be 10 years. c. A trademark was purchased from Walton Company for $50,000 on July 1, 2016. Expenditures for successful litigation in defense of the trademark totaling $10,400 were paid on July 1, 2019. Kerr estimates that the useful life of the trademark will be 25 years from the date of acquisition.

Answer 1

Answer 1
	Kerr Corporation
	Intangible Assets section of balance sheet
	Dec 31, 2019
	Franchise	57510
	Patent	78588
	Trademark	53164
	Total	189262
	Schedule 1
	Cost at Jan 1 2019	63900
	Amortisation for 2019	6390
	Balance at Dec 31 2019	57510
	Schedule 2
	Capitalised cost	87320
	Amortisation for 2019	8732
	Balance at Dec 31 2019	78588
	Schedule 3
	Cost of Trademark at July 1 2016	50000
	Amorisation through Dec 31 2018 (2.5 years)	5000
	Amorisation 1 jan 2019 to 30 june 2019 (0.5 years)	1000
	Cost of successful ligitation in 2019	10400
	Balance July 1 2019	54400
	Amorisation 1 Jul 2019 to 31 Dec 2019 (0.5 years)	1236
	Balance at Dec 31 2019	53164
Answer 2
	Amortisation - Franchise	6390
	Franchse Fee on Revenue	37200
	Imputed Interest expense	8946
	Total Franchise expense	52536
	Amortisation - Patent	8732
	Amortisation - Trademark (1000+1236)	2236
	Total Expense	63504

WORKINGS

	FRANCHISE FEE	$
	Payment in 2019	26000		Revenue from Franchise	930000		Balance beginning 2019	63900
	Present Value of future payments	37900		Royalty payment @4% of revenue	37200		Interest cost @14%	8946
	Intangible asset (Franchise) beginning 2019	63900
	Life	10 years
	Amortisation in 2019	6390
	Franchise Balance closing 2019	57510
	PATENTS	$
	Experiment and Development Costs	69000
	Costs for Registration and Patent	18320
	Total costs for Patent	87320
	Life	10 years
	Amortisation in 2019	8732
	Patent Balance closing 2019	78588
	TRADEMARKS	$
	Trademark cost on July 1 2016	50000		Amotisation for 6 months before July 1 2019	1000
	Useful life	25 years		Amotisation for 6 months after July 1 2019	1236
	Amoritsation per annum till July 1 2019	2000		Amortisation for 2019	2236
	Cost on July 1 2016	50000
	Usage till July 1 2019	3 years
	Amortisation till July 1 2019 (2000 x 3)	6000
	Balance on July 1 2019	44000
	Ligitation expense on July 1 2019	10400
	Updated balance on July 1 2019	54400
	Remaining Life on July 1 2019	22 years
	Amoritsation per annum after July 1 2019	2473
	Amortisation for 6 months after July 1 2019	1236
	Balance at end of 2019	53164

Answer 2

Note : Experimental and development cost of patents should be expensed out rather than capitalized