resented below is selected information for Pharoah Company. Answer the questions
ID: 2587962 • Letter: R
Question
resented below is selected information for Pharoah Company.
Answer the questions asked about each of the factual situations.
1. Pharoah purchased a patent from Vania Co. for $1,150,000 on January 1, 2015. The patent is being amortized over its remaining legal life of 10 years, expiring on January 1, 2025. During 2017, Pharoah 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. Pharoah bought a franchise from Alexander Co. on January 1, 2016, for $325,000. The carrying amount of the franchise on Alexander’s books on January 1, 2016, was $475,000. The franchise agreement had an estimated useful life of 30 years. Because Pharoah 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, Pharoah incurred organization costs of $262,500. What amount of organization expense should be reported in 2017?
4. Pharoah purchased the license for distribution of a popular consumer product on January 1, 2017, for $145,000. 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, Pharoah 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. amortisation for 2015 and 2016 = (1150000/10 )*2 = 230000
amortisation for 2017 (1150000 - 230000) / (6-2) = 230000
accumulated amortisation = 460000
the amount to be reported = 1150000 - 460000 = $ 690000
2. franchise should be amortised over 10 years (upto 2025)
amount to be amortised = 325000 / 10 = $ 32500
3. these cost should be expensed as incurred . therefor , $ 262500 sholud be reported as expense in 2017.
4.Because the license can be easily renewed (at nominal cost), it has an indefinite life. Thus,no amortization will be recorded. The license will be tested for impairment in future periods.
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