Let's address each situation one by one.
1) Patent Amortization and Balance Sheet Value at December 31, 2014
Alatorre acquired the patent for $1,000,000 on January 1, 2012, with a remaining legal life of 10 years. However, by 2014, they determined that the economic benefits would not last longer than 6 years.
To calculate the amortization:
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Initial estimated life: 10 years (from January 1, 2012).
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Annual Amortization (10 years): \[ \text{Annual Amortization} = \frac{1,000,000}{10} = 100,000 \text{ per year} \]
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Amortization from 2012 to 2014 (3 years): \[ \text{Total Amortization} = 100,000 \times 3 = 300,000 \]
At the end of 2014, Alatorre reassesses the life of the patent to 6 years total from the date of acquisition. Since 3 years have been amortized already, they have 3 years left.
- Revised Annual Amortization (6 years): \[ \text{Remaining Value} = 1,000,000 - 300,000 = 700,000 \] \[ \text{Remaining useful life} = 3 \text{ years} \rightarrow \text{New Annual Amortization} = \frac{700,000}{3} = 233,333.33 \]
However, we still have 3 more years of amortization, but for the balance sheet value at December 31, 2014, we retain what has already been calculated.
- Balance Sheet Value at December 31, 2014: \[ \text{Patent Value} = 1,000,000 - 300,000 = 700,000 \]
Thus, the amount to be reported in the balance sheet for the patent net of accumulated amortization at December 31, 2014 is $700,000.
2) Franchise Amortization for the Year Ended December 31, 2014
Alatorre bought a franchise for $400,000 with a useful life of 30 years. Since they determined that it will not be retained beyond 2022, we should amortize it over its shorter useful life.
- Remaining useful life = (2022 - 2013) = 9 years.
Annual Amortization: \[ \text{Annual Amortization} = \frac{400,000}{9} \approx 44,444.44 \]
So for the year ended December 31, 2014, the amount to be amortized is $44,444.44.
3) Organization Expense Reporting for 2014
Organization costs are generally expensed immediately, as current accounting standards typically require these costs to be expensed rather than capitalized.
Therefore, the amount of organization expense to be reported in 2014 would be the entire amount incurred: \[ \text{Organization Expense} = 275,000 \]
So, the organization expense reported should be $275,000 for 2014.
4) License Amortization for the Year Ended December 31, 2014
Alatorre purchased a license for $150,000, which has an initial term of 5 years. Since the license can be renewed indefinitely for successive 5-year terms, the amortization period should be the initial period of 5 years.
Annual Amortization: \[ \text{Annual Amortization} = \frac{150,000}{5} = 30,000 \]
For the year just ended December 31, 2014, the amount to be amortized is $30,000.
Summary of Answers
- Patent Value at December 31, 2014: $700,000
- Franchise Amortization for 2014: $44,444.44
- Organization Expense for 2014: $275,000
- License Amortization for 2014: $30,000