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Determining the GAAP Life of Intangible Assets

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(a) A company purchased a patent on January 1, 2008, for $2,500,000. The patent's legal life is 20 years but the company estimates that the patent's useful life will only be 5 years from the date of acquisition. On June 30, 2008, the company paid legal costs of $162,000 in successfully defending the patent in an infringement suit. Prepare the journal entry to amortize the patent at year end on December 31, 2008.

(b) Terrific Company purchased a franchise from the lovely Food Company for $400,000 on January 1, 2008. The franchise is for an indefinite time period and gives Terrific Company the exclusive rights to sell Tasty Wings in a particular territory. Prepare the journal entry to record the acquisition of the franchise and any necessary adjusting entry at year end on December 31, 2008.

(c) Deer Company incurred research costs of $200,000 and successful development costs of $500,000 in 2008 in developing a new product that the company was able to patent. The company expects the product to be useful for 10 years. Prepare the necessary journal entries during 2008 to record these events and any adjustments at year end on December 31, 2008.

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Solution Summary

This solution explains the life to use for various types of intangible assets under Generally Accepted Accounting Principles and illustrates journal entries to record periodic amortization.

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(a) A limited-life asset is amortized over the lesser of its legal life or estimated useful life. The patent cost includes those costs to successfully defend the patent. (Costs to unsuccessfully defend the patent are expensed.) The original cost will be amortized over 5 years, but the defense cost will be amortized over 4.5 years. Therefore, the 2008 amortization is ...

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