Early in Year 2, Merle Enterprises undertook activities in search of better ways

Question

Early in Year 2, Merle Enterprises undertook activities in search of better ways of delivering accounting handouts to students at a cost of $280,000.   Merle’s primary commercial activities involve accounting educational services to students at several universities.  The improved accounting handout delivery service research produced ideas that Merle converted into patents at an additional cost of $20,000.  Analysts reliably estimate the patents are worth $4,500,000.  The patents were granted on August 31, Year 2, and have an estimated useful economic life of 10 years from that date.

Required:

$__________ What Research & Development Expense will appear in Merle’s income statement for Year 2?

$__________ At what carrying value will these patents appear in Merle’s balance sheet on December 31, Year 3?

Explanation / Answer

Research & Development Expense will appear in Merle’s income statement for Year 2 = $ 280000

carrying value will these patents appear in Merle’s balance sheet on December 31, Year 3 = 20000 - (20000/10* 4/12 + 20000/10)

carrying value will these patents appear in Merle’s balance sheet on December 31, Year 3 = $ 17,333

Note : No impairment loss would be done , since market value is greater than book value

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