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    Accounting treatment for franchise, trademark, patent

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    Information concerning Sandro Corp. intangible assets is as follows.
    1. On Jan 1, 2010 Sandro signed an agreement to operate as a franchisee of Hsian Copy Service, Inc. for an initial fee of $75,000. Of this amount $15000 was paid when the agreement was signed and the balance is payable in 4 annual pmts of $15,000 each, beginning Jan. 1, 2011. The agreement provides that the down pmt is not refundable and no future services are required of the franchisor. The present value at Jan 1, 2010 of the 4 annual pmts discounted at 14 %( the implicit rate for a loan of this type) is $43,700. The agreement also provides that 5% of the revenue from the franchise must be paid to the franchisor annually. Sandro's revenue from the franchise for 2010 was $900,000. Sandro estimates the useful life of the franchise to be 10 years.

    2. Sandro incurred $65,000 of experimental and development costs in its laboratory to develop a patent that was granted on January 2, 2010. Legal fees and other costs associated with registration of the patent totalled $17,600. Sandro estimates that the useful life of the patent will be 8 yrs.

    3. A trademark was purchased from Shanghai Co. for $36,000 on July 1, 2007. Expenditures for successful litigation in defence of the trademark totalling $10,500 were paid on July 1, 2010. Sandro estimates that the useful life of the trademark will be 20 years from the date of acquisition.

    (a) Prepare a schedule showing the intangible assets section of Sandro's balance sheet at Dec. 31, 2010. Show supporting computations in good form.
    (b) Prepare a schedule showing all expenses resulting from the transactions that would appear on Sandro's income statement for the year ended Dec. 31, 2010. Show supporting computations in good form.

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    Solution Preview

    1. The franchise should be reported at the sum of cash paid and the present value of notes payable.
    01/01/2010 Franchise 58,700
    Cash 15,000
    Notes payable 43,700
    12/31/2010 Selling expense 45,000
    Cash 45,000
    Amortization expense 5,870
    Accumulated amortization 5,870
    2. The 65,000 of experimental and development costs are expensed in 2010 because R&D costs are expensed rather than capitalized. The ...