Question
(intangible amortization) presented below is selected information for alatorre company.
1) Alatorre purchase a patent from vania company for 1,000,000 on January 1 2012. The patent is being amortized over its remaining legal life of 10 years, expiring on January 1 2022. During 2014, Alatorre determined that the economic benefits of the patent would not last longer than 6 years from the date of acquisition. What amount should be reported in the balance sheet for the patent net of accumulated amortization, at December 31 2014?
2) Alatorre bought a franchise from Alexander company on January 1 2013, for $400,000. The carrying amount on the franchise on Alexander books on January 1 2013, was $500,000. The franchise agreement had an estimated useful life of 30 years. Because Alatorre must enter a competitive bidding at the end of 2015, it is unlikely that the franchise will be retained beyond 2022. What amount should be amortized for the year ended December 31 2014?
3) On January 1 2014, Alatorre incurred organization cost of $275,000. What amount of organization expense should be reported in 2014?
4) Alatorre purchased the license for distribution of a popular consumer product on January 1 2014, for $150,000. It is expected that this product will generate cash flow for an indefinite period of time. The license has an initial term of 5 years but by paying a nominal fee, Alatorre can renew the license indefinitely for successive 5 years terms. What amount should be amortized for the year just ended December 31, 2014.
Instructions
Answer the question asked about each of the factual situations. And pass entry for each.
1) Alatorre purchase a patent from vania company for 1,000,000 on January 1 2012. The patent is being amortized over its remaining legal life of 10 years, expiring on January 1 2022. During 2014, Alatorre determined that the economic benefits of the patent would not last longer than 6 years from the date of acquisition. What amount should be reported in the balance sheet for the patent net of accumulated amortization, at December 31 2014?
2) Alatorre bought a franchise from Alexander company on January 1 2013, for $400,000. The carrying amount on the franchise on Alexander books on January 1 2013, was $500,000. The franchise agreement had an estimated useful life of 30 years. Because Alatorre must enter a competitive bidding at the end of 2015, it is unlikely that the franchise will be retained beyond 2022. What amount should be amortized for the year ended December 31 2014?
3) On January 1 2014, Alatorre incurred organization cost of $275,000. What amount of organization expense should be reported in 2014?
4) Alatorre purchased the license for distribution of a popular consumer product on January 1 2014, for $150,000. It is expected that this product will generate cash flow for an indefinite period of time. The license has an initial term of 5 years but by paying a nominal fee, Alatorre can renew the license indefinitely for successive 5 years terms. What amount should be amortized for the year just ended December 31, 2014.
Instructions
Answer the question asked about each of the factual situations. And pass entry for each.
Answers
GPT-4o mini
Let's go through each of the four items separately.
### 1) Patent Amortization
**Calculation:**
- Purchase Cost: $1,000,000
- Original useful life: 10 years (starting January 1, 2012)
- Annual Amortization (for original life): $1,000,000 / 10 = $100,000 per year
**Amortization Period until 2014:**
- From January 1, 2012, to December 31, 2014 (3 years)
- Total Amortization for 3 years: 3 * $100,000 = $300,000
**New Useful Life Assessment (from 2014):**
- Based on the revised assessment in 2014, the remaining useful life is 6 years from Jan 1, 2014.
- Total Amortization over the new remaining life: $1,000,000 / 6 = $166,667 per year
**Balance at December 31, 2014:**
- Accumulated Amortization until December 31, 2014:
- For 2012-2013: $200,000 (2 years)
- For 2014: $166,667 (if using revised assessment)
- Total Accumulation = $200,000 + $166,667 = $366,667
**Net Balance on Patent as of December 31, 2014:**
- Patent carrying amount = $1,000,000 - $366,667 = $633,333
**Journal Entry:**
```plaintext
Amortization Expense 166,667
Accumulated Amortization - Patent 166,667
```
### 2) Franchise Amortization
**Calculation:**
- Purchase Cost: $400,000
- Original Useful Life: 30 years
- Annual Amortization (for original life): $400,000 / 30 = $13,333 per year
However, since the estimated life is set to end in 2022, we need to recalculate the amortization.
**Amortization Period until 2014:**
- From January 1, 2013, to December 31, 2014 (2 years)
- Total Amortization for 2 years: 2 * $13,333 = $26,667
**Revised Amortization life until 2022:**
- Assuming the franchise will not be retained beyond 2022, the life is effectively 10 years from acquisition (2013-2022).
- Annual Amortization for this cycle: $400,000 / 10 = $40,000 per year.
**Total Amortization for 2013 and 2014:**
- Total = $40,000 (for 2013) + $40,000 (for 2014) = $80,000
**Journal Entry for 2014:**
```plaintext
Amortization Expense 40,000
Accumulated Amortization - Franchise 40,000
```
### 3) Organization Costs
According to US GAAP and IFRS, organization costs should be expensed as incurred.
**Amount to report in 2014:**
- Organization Cost: $275,000 (entire amount as expense)
**Journal Entry:**
```plaintext
Organization Expense 275,000
Cash/Payable 275,000
```
### 4) License Amortization
**Calculation:**
- Purchase Cost: $150,000
- The License has an indefinite life but has an initial term of 5 years.
Since it can be renewed indefinitely for successive terms, it isn't subject to amortization. Therefore, no amortization will be recorded.
**Amount to amortize for 2014:**
- Total Amortization = $0
**Journal Entry:**
(No journal entry for amortization since there is none)
```plaintext
No entry necessary for 2014.
```
### Summary of Results:
1. **Patent net amount at December 31, 2014:** $633,333
2. **Amortization for Franchise for 2014:** $40,000
3. **Organization Expense for 2014:** $275,000
4. **License Amortization for 2014:** $0
Feel free to ask if you need further clarification or assistance!
### 1) Patent Amortization
**Calculation:**
- Purchase Cost: $1,000,000
- Original useful life: 10 years (starting January 1, 2012)
- Annual Amortization (for original life): $1,000,000 / 10 = $100,000 per year
**Amortization Period until 2014:**
- From January 1, 2012, to December 31, 2014 (3 years)
- Total Amortization for 3 years: 3 * $100,000 = $300,000
**New Useful Life Assessment (from 2014):**
- Based on the revised assessment in 2014, the remaining useful life is 6 years from Jan 1, 2014.
- Total Amortization over the new remaining life: $1,000,000 / 6 = $166,667 per year
**Balance at December 31, 2014:**
- Accumulated Amortization until December 31, 2014:
- For 2012-2013: $200,000 (2 years)
- For 2014: $166,667 (if using revised assessment)
- Total Accumulation = $200,000 + $166,667 = $366,667
**Net Balance on Patent as of December 31, 2014:**
- Patent carrying amount = $1,000,000 - $366,667 = $633,333
**Journal Entry:**
```plaintext
Amortization Expense 166,667
Accumulated Amortization - Patent 166,667
```
### 2) Franchise Amortization
**Calculation:**
- Purchase Cost: $400,000
- Original Useful Life: 30 years
- Annual Amortization (for original life): $400,000 / 30 = $13,333 per year
However, since the estimated life is set to end in 2022, we need to recalculate the amortization.
**Amortization Period until 2014:**
- From January 1, 2013, to December 31, 2014 (2 years)
- Total Amortization for 2 years: 2 * $13,333 = $26,667
**Revised Amortization life until 2022:**
- Assuming the franchise will not be retained beyond 2022, the life is effectively 10 years from acquisition (2013-2022).
- Annual Amortization for this cycle: $400,000 / 10 = $40,000 per year.
**Total Amortization for 2013 and 2014:**
- Total = $40,000 (for 2013) + $40,000 (for 2014) = $80,000
**Journal Entry for 2014:**
```plaintext
Amortization Expense 40,000
Accumulated Amortization - Franchise 40,000
```
### 3) Organization Costs
According to US GAAP and IFRS, organization costs should be expensed as incurred.
**Amount to report in 2014:**
- Organization Cost: $275,000 (entire amount as expense)
**Journal Entry:**
```plaintext
Organization Expense 275,000
Cash/Payable 275,000
```
### 4) License Amortization
**Calculation:**
- Purchase Cost: $150,000
- The License has an indefinite life but has an initial term of 5 years.
Since it can be renewed indefinitely for successive terms, it isn't subject to amortization. Therefore, no amortization will be recorded.
**Amount to amortize for 2014:**
- Total Amortization = $0
**Journal Entry:**
(No journal entry for amortization since there is none)
```plaintext
No entry necessary for 2014.
```
### Summary of Results:
1. **Patent net amount at December 31, 2014:** $633,333
2. **Amortization for Franchise for 2014:** $40,000
3. **Organization Expense for 2014:** $275,000
4. **License Amortization for 2014:** $0
Feel free to ask if you need further clarification or assistance!