Answer the questions asked about each of the factual situations. 1. Ivanhoe purc

Question

Answer the questions asked about each of the factual situations.

1. Ivanhoe purchased a patent from Vania Co. for $1,240,000 on January 1, 2015. The patent is being amortized over its remaining legal life of 10 years, expiring on January 1, 2025. During 2017, Ivanhoe 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. Ivanhoe bought a franchise from Alexander Co. on January 1, 2016, for $370,000. The carrying amount of the franchise on Alexander’s books on January 1, 2016, was $520,000. The franchise agreement had an estimated useful life of 30 years. Because Ivanhoe 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, Ivanhoe incurred organization costs of $285,000. What amount of organization expense should be reported in 2017?

4. Ivanhoe purchased the license for distribution of a popular consumer product on January 1, 2017, for $154,000. 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, Ivanhoe 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. It should report the patent at 744000. The computation of accumulatedamortization is as follows:Amortization for 2015 and 2016 (1240000/10) x 2 = 248,000Amortization for 2017 ($1240000 – 248000) / (6 – 2) = 248,000Accumulated amortization on 12/31/2017 = 600,000So, the remaining value is 1240000-248000-248000=744000.

2. Since its highly probable that he will not be able to retain franchise after 10 years (after 2025), should amortise for 10 year life. and hence, amortization for 31dec 2017 should be 370000/10=37000.

3.Since Organization Cost should be expensed as incurred, 285000 should be reported as expense in 2017

4. Since Licence can be renewed at nominal cost and have indefinite life, not amortization is required.

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