Exercise 12-4 Presented below is selected information for Cullumber Company. Ans

Question

Exercise 12-4

Presented below is selected information for Cullumber Company.

Answer the questions asked about each of the factual situations.

1. Cullumber purchased a patent from Vania Co. for $1,230,000 on January 1, 2015. The patent is being amortized over its remaining legal life of 10 years, expiring on January 1, 2025. During 2017, Cullumber determined that the economic benefits of the patent would not last longer than 6 years from the date of acquisition. What amount should be reported in the balance sheet for the patent, net of accumulated amortization, at December 31, 2017?

2. Cullumber bought a franchise from Alexander Co. on January 1, 2016, for $365,000. The carrying amount of the franchise on Alexander’s books on January 1, 2016, was $515,000. The franchise agreement had an estimated useful life of 30 years. Because Cullumber must enter a competitive bidding at the end of 2018, it is unlikely that the franchise will be retained beyond 2025. What amount should be amortized for the year ended December 31, 2017?

3. On January 1, 2017, Cullumber incurred organization costs of $282,500. What amount of organization expense should be reported in 2017?

4. Cullumber purchased the license for distribution of a popular consumer product on January 1, 2017, for $153,000. It is expected that this product will generate cash flows for an indefinite period of time. The license has an initial term of 5 years but by paying a nominal fee, Cullumber can renew the license indefinitely for successive 5-year terms. What amount should be amortized for the year ended December 31, 2017?

Explanation / Answer

Part 1)

The amount that should be reported in the balance sheet for the patent, net of accumulated amortization, at December 31, 2017 is calculated as below:

Amount to be Reported = Cost of Patent - Accumulated Amortization

where Accumulated Amortization = Amortization for 2015 + Amortization for 2016 + Amortization for 2017

Amortization for 2015 and 2016 = Cost of Patent/Estimated Life = 1,230,000/10 = $123,000

Amortization for 2017 = (Cost of Patent - Amortization for 2015 - Amortization for 2016)/(6 - 2) = (1,230,000 - 123,000 - 123,000 = $246,000

Now, we can arrive at the amount to be reported as below:

Amount to be Reported = 1,230,000 - 123,000 - 123,000 - 246,000 = $738,000

_____

Part 2)

In this case, we will take the estimated useful life as the period for which it is certain that the franchise will be held by Cullumber. Therefore, the estimated useful life will be 10 years (January 1, 2016 to December 31st, 2025). The amount to be amortized is determined as below:

Amount to be Amortized = Cost of Franchise/Estimated Useful Life = 365,000/10 = $36,500

_____

Part 3)

Organization expenses are reported as incurred. Therefore, the amount of organization expense to be reported for 2017 will be $282,500.

Amount to be Reported = $282,500

_____

Part 4)

The license will have an indefinite life in the given case. It is because the license can be renewed at a very nominal fee. As the useful life for this license cannot be determined, its cost cannot be amortized. Therefore, the amount that should be amortized for the year ended December 31, 2017 will be $0.

Amount to be Amortized = $0

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