Presented below is selected information for Sandhill Company. Answer the questio

Question

Presented below is selected information for Sandhill Company.

Answer the questions asked about each of the factual situations.

1. Sandhill purchased a patent from Vania Co. for $1,190,000 on January 1, 2015. The patent is being amortized over its remaining legal life of 10 years, expiring on January 1, 2025. During 2017, Sandhill 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. Sandhill bought a franchise from Alexander Co. on January 1, 2016, for $345,000. The carrying amount of the franchise on Alexander’s books on January 1, 2016, was $495,000. The franchise agreement had an estimated useful life of 30 years. Because Sandhill 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, Sandhill incurred organization costs of $272,500. What amount of organization expense should be reported in 2017?

4. Sandhill purchased the license for distribution of a popular consumer product on January 1, 2017, for $149,000. 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, Sandhill can renew the license indefinitely for successive 5-year terms. What amount should be amortized for the year ended December 31, 2017?

Explanation / Answer

1. Amount should be reported:

=$714,000 (net of $476,000 accumulated Depriciation)

Amortization for 2015 and 2016 =($1,190,000/10)×2

=$238,000

2017 Amortization=(1,190,000-$238,000)/(6-2)=$238,000

Accumulated Amortization 12/31/17=$476,000

Book value on 12/31/17=$1,190,000-$476,000

=$714,000

2.

Sandhill should amortize the franchise over it's estimated useful life. Because it is uncertain that sandhill will be able to retain the franchise at the end of 2025. It should be amortize over 10 years. The amount of Amortization on the franchise for the year ended Dec 31, 2016 is :

=$345,000/10

=$34,500

3.

Expense=$272,500

These costs should be expensed as incurred. Therefore $272,500 of organization expense is reported in income statement for 2017.

4.

Amortization=$0

Because license can be easily renewed(at nominal cost), it has an indefinite life. So no Amortization will be recorded. The license will be tested for impairment in future periods.

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