(a) Tandem Industries purchased a patent on January 1, 2014, for $2,000,000. The

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(a)   Tandem Industries purchased a patent on January 1, 2014, for $2,000,000. 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, 2014, the company paid legal costs of $135,000 in successfully defending the patent in an infringement suit. Prepare the journal entry to amortize the patent at year end on December 31, 2014.

(b)    Seminole Partners purchased a franchise from Unhealthy Food Company for $400,000 on January 1, 2014. The franchise is for an indefinite time period and gives Seminole Partners the exclusive rights to sell Unhealthy Chicken Wings in a particular territory. Record the journal entry to record the acquisition of the franchise and any necessary adjusting entry at year end on December 31, 2014.

(c)    Young Corporation incurred research and development costs of $500,000 in 2014 in developing a new product. Record the necessary journal entries during 2014 to record these events and any adjustments at year end on December 31, 2014.

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Explanation / Answer

The maximum life of a franchise is 40 years or the life of the franchise agreement, whichever is shorter. Hence the amortization is spread over 40 years.

Journal for Tandem Industries Date Particulars Amount 1-Jan Patent A/c 2000000 To Cash A/c 2000000 30-Jun Patent A/c 135000 To Cash A/c 135000 31-Dec Amortization A/c 427000 To Patent A/c 427000 31-Dec Profit & Loss A/c 427000 To Amortization A/c 427000 Journal for Seminole Partners Date Particulars Amount 1-Jan Franchise A/c 400000 To Cash A/c 400000 31-Dec Amortisation A/c 10000 To Franchise A/c 10000 Journal for Young Corporation Date Particulars Amount R&D Expense A/c 500000 To Cash A/c 500000

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