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# Acquisition of patent, amortization, change in useful life

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Miracle Printers (MP) manufactures printers. Assume that MP recently paid \$600,000 for a patent on a new laser printer. Although it gives legal protection for 20 years, the patent is expected to provide a competitive advantage for only eight years.

Requirements
1. Assuming the straight-line method of amortization, make journal entries to record (a) the purchase of the patent and (b) amortization for year 1.
2. After using the patent for four years, MP learns at an industry trade show that another company is designing a more efficient printer. On the basis of this new information, MP decides, starting with year 5, to amortize the remaining cost of the patent over two remaining years, giving the patent a total useful life of six years. Record amortization for year 5.

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#### Solution Summary

Your tutorial is in Excel, attached, with instructional comments to guide you.

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## E11-4 Depreciation; E11-1 Change in Estimate; E12-6 Intangibles; E12-16 R&D; P12-3

Please see attached Excel file for proper format.

E11-4

Purchased Machinery on May 1, 2007 325,000
Useful life 10 Years
Salvage Value 15,000
Production of 240,000 Units
Working hours 25,000
During 2008 they used the machinery for 2,650 Hours
and produced 25,500 Units

Compute depreciation charge for 2008 under:

A) Straight Line
B) Units of output
C) Working hours
D) Sum of years digits
E) Declining Balance (use 20% as annual rate)

E11-11 (Depreciation-Change in Estimate) Machinery purchased for \$60,000 by Tom Brady Co. in 2003 was originally estimated to have a life of 8 years with a salvage value of \$6,000 at the end of that time. Depreciation has been entered for 5 years on this basis. In 2008, it is determined that the total estimated life should be 11 years with a salvage value of \$4,500 at the end of that time. Assume straight-line depreciation.
Instructions

(a) Prepare the entry to correct the prior years' depreciation, if necessary.
(b) Prepare the entry to record depreciation for 2008.

E12-6 (Recording and Amortization of Intangibles) Rolanda Marshall Company, organized in 2006,
has set up a single account for all intangible assets. The following summary discloses the debit entries that have been recorded during 2007.
1/2/07 Purchased patent (8-year life) 380,000
4/1/07 Purchased goodwill (indefinite life) 360,000
6/1/07 Purchased franchise with 10-year life; expiration date 6/1/17 450,000
8/1/07 Payment of copyright (6-year life) 156,000
9/1/07 Research and development costs 215,000
1,561,000

Instructions

Prepare the necessary entries to clear the Intangible Assets account and to set up separate accounts for distinct types of intangibles.

Make the entries as of December 31, 2007, recording any necessary amortization and reflecting all balances accurately as of that date. (Use straight-line amortization.)

E12-16 (Accounting for R&D Costs) Leontyne Price Company from time to time embarks on a research program when a special project seems to offer possibilities.

In 2006 the company expends \$325,000 on a research project, but by the end of 2006 it is impossible to determine whether any benefit will be derived from it.

Instructions

(a) What account should be charged for the \$325,000, and how should it be shown in the financial statements?
The amount should be charged to the Research and Development expenses in the Income Statement?
(b) The project is completed in 2007, and a successful patent is obtained. The R&D costs to complete the project are \$110,000.

The administrative and legal expenses incurred in obtaining patent number 472-1001-84 in 2007 total \$16,000. The patent has an expected useful life of 5 years.

Record these costs in journal entry form. Also, record patent amortization (full year) in 2007.
(c) In 2008, the company successfully defends the patent in extended litigation at a cost of \$47,200, thereby extending the patent life to December 31, 2015.

What is the proper way to account for this cost? Also, record patent amortization (full year) in 2008.
(d) Additional engineering and consulting costs incurred in 2008 required to advance the design of a product to the manufacturing stage total \$60,000.

These costs enhance the design of the product considerably. Discuss the proper accounting treatment for this cost.

P12-3 (Accounting for Franchise, Patents, and Trade Name) Information concerning Haerhpin Corporation's intangible assets is as follows.

1. On January 1, 2007, Haerhpin signed an agreement to operate as a franchisee of Hsian Copy Service, Inc. for an initial franchise fee of \$75,000. Of this amount, \$15,000 was paid when the agreement was signed, and the balance is payable in 4 annual payments of \$15,000 each, beginning January 1, 2008. The agreement provides that the down payment is not refundable and no future services are required of the franchisor. The present value at January 1, 2007, of the 4 annual payments 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. Haerhpin's revenue from the franchise for 2007 was \$950,000. Haerhpin estimates the useful life of the franchisen to be 10 years. (Hint: You may want to refer to Appendix 18A to determine the proper accounting treatment for the franchise fee and payments.)

2. Haerhpin incurred \$65,000 of experimental and development costs in its laboratory to develop a patent that was granted on January 2, 2007. Legal fees and other costs associated with registration of the patent totaled \$13,600. Haerhpin estimates that the useful life of the patent will be 8 years.

3. A trademark was purchased from Shanghai Company for \$32,000 on July 1, 2004. Expenditures for successful litigation in defense of the trademark totaling \$8,160 were paid on July 1, 2007. Haerhpin estimates that the useful life of the trademark will be 20 years from the date of acquisition.

Instructions

(a) Prepare a schedule showing the intangible assets section of Haerhpin's balance sheet at December 31, 2007. Show supporting computations in good form.

(b) Prepare a schedule showing all expenses resulting from the transactions that would appear on
Haerhpin's income statement for the year ended December 31, 2007. Show supporting computations in good form.

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