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Accounting for Patents, Franchises and R&D

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Jimmy Carter Company has provided information on intangible assets as follows

A patent was purchased from Gerald Ford Company for $2,000,000 on January 1, 2006. Carter 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 $2,000,000 when Ford sold it to Carter.

During 2007, a franchise was purchased from Ronald Reagan Company for $480,000. In addition, 5% of
revenue from the franchise must be paid to Reagan. Revenue from the franchise for 2007 was $2,500,000.
Carter estimates the useful life of the franchise to be 10 years and takes a full year's amortization in the year
of purchase.

Carter incurred research and development costs in 2007 as follows:
Materials and Equipment 142,000
Personnel 189,000
Indirect Costs 102,000

Carter estimates that these new costs will be recouped by December 31, 2010. The materials and equipment
purchased have no alternative uses.

On January 1, 2007, because of recent events in the field, Carter estimates that the remaining life of the
patent purchased on January 1, 2006, is only 5 years from January 1, 2007.

Instructions:
(a) Prepare a schedule showing the intangibles section of Carter's balance sheet at December 31, 2007.
Show supporting computations in good form.

(b) Prepare a schedule showing the income statement effect for the year ended December 31, 2007, as a
result of the facts above. Show supporting computations in good form.

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The solution explains the accounting for Patents, Franchises and R&D

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Jimmy Carter Company has provided information on intangible assets as follows

A patent was purchased from Gerald Ford Company for $2,000,000 on January 1, 2006. Carter 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 $2,000,000 when Ford sold it to Carter.

During 2007, a franchise was purchased from Ronald Reagan Company for $480,000. In addition, 5% of
revenue from the franchise must be paid to Reagan. Revenue from the franchise for 2007 was $2,500,000.
Carter estimates the useful life of the franchise to be 10 years and takes a full year's amortization in the year
of purchase.

Carter incurred research and development ...

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