Please see attached question. P12-4B

c12BProblems.indd Page 1 17/10/12 9:34 PM user-f409 B PROBLEMS 2 3 P12-1B (Correct Intangible Asset Account) Dolphin Co., organized in 2013, has set up a single account for all intangible assets. The following summary discloses the debit entries that have been recorded during 2013 and 2014. Intangible Assets 3/1/13 3/1/13 4/1/13 6/30/13 9/1/13 12/31/13 6/30/14 9/1/14 10-year franchise agreement; expires 2/28/24 Organization costs Advance payment for 2 years for office space Purchased a patent (8-year life) Cost to develop a patent (10-year life) Net operating loss for 2013 Research and development costs Legal fee to successfully defend internally developed patent $ 60,000 7,000 24,000 80,000 40,000 61,000 265,000 13,500 Instructions Prepare the necessary entries to clear the Intangible Assets account and to set up separate accounts for distinct types of intangibles. Make the entries as of December 31, 2014, recording any necessary amortization and reflecting all balances accurately as of that date. (Ignore income tax effects.) 2 3 P12-2B (Accounting for Patents) Dance Technologies holds a valuable patent (No. 782) for Dance-omatic, an electronic system that provides individualized, intercalative dance instruction that also provides real-time feedback. Dance does not manufacture or sell the products and processes it develops. Instead, it conducts research and develops products and processes which it patents, and then assigns the patents to manufacturers on a royalty basis. Occasionally it sells a patent. The history of Dance's patent number 782 is as follows. Date Activity Cost 2006-2007 Oct 2007 Feb 2008 Aug 2008 Research conducted to develop Dance-o-matic Design and construction of prototype Testing of models Costs (engineering and legal fees) associated with patent application; patent granted September 30, 2009 Engineering activity to advance the prototype to the manufacturing stage Legal fees paid in unsuccessful attempt to broaden the patent's coverage Research and development activity to advance the real-time feedback component Legal fees paid to successfully defend the patent against a competitor $538,500 211,000 65,000 Mar 2009 July 2010 Oct 2012 Jan 2014 50,500 256,000 23,000 165,000 20,500 Dance assumed a useful life of 14 years when it received the initial patent. On January 1,2013, it revised its useful life estimate downward to 6 remaining years. Amortization is computed for a full year if the cost is incurred prior to July 1, and no amortization for the year if the cost is incurred after June 30. The company's year ends December 31. Instructions Compute the carrying value of patent No. 782 on each of the following dates: (a) December 31,2008. (b) December 31,2012. (c) December 31,2014. 2 3 P12-3B (Accounting for Franchise, Patents, and Trade Name) Information concerning Cao Corporation's intangible assets is as follows. 1. Cao incurred $115,000 of experimental and development costs in its laboratory during 2013 to develop a patent that was granted on July 1, 2014. Legal fees and other costs during 2014 associated with registration of the patent totaled $27,000. Expenditures for successful litigation in defense of the trademark totaling $8,700 were paid on November 1, 2014. Cao estimates that the useful life of the patent will be 10 years. 2. A trademark was purchased from Jian Company for $24,000 on January 1,2011. Cao estimates that the useful life of the trademark will be 20 years from the date of acquisition. 1 c12BProblems.indd Page 2 17/10/12 9:34 PM user-f409 2 Chapter 12 Intangible Assets 3. On January 1, 2014, Cao signed an agreement to operate as a franchisee of ATK Ltd. for an initial franchise fee of $150,000. Of this amount, $30,000 was paid when the agreement was signed, and the balance is payable in 6 annual payments of $20,000 each, beginning January 1,2015. The agreement provides that the down payment is not refundable and no future services are required of the franchisor. The present value at January 1, 2014, of the 6 annual payments discounted at 12% (the implicit rate for a loan of this type) is $82,228. The agreement also provides that 8% of the revenue from the franchise must be paid to the franchisor annually. Cao's revenue from the franchise for 2014 was $600,000. Cao estimates the useful life of the franchise to be 12 years. (Hint: You may want to refer to Appendix 18A to determine the proper accounting treatment for the franchise fee and payments.) Instructions (a) Prepare a schedule showing the intangible assets section of Cao's balance sheet at December 31, 2014. Show supporting computations in good form. (b) Prepare a schedule showing all expenses resulting from the transactions that would appear on Cao's income statement for the year ended December 31, 2014. Show supporting computations in good form. (AICPA adapted) 9 10 P12-4B (Accounting for R&D Costs) During 2012, Oak Company purchased a building site for its proposed research and development laboratory at a cost of $125,000. Construction of the building was started in 2012. The building was completed on December 31,2013, at a cost of $750,000 and was placed in service on January 2, 2014. The estimated useful life of the building for depreciation purposes was 25 years. The straight-line method of depreciation was to be employed, and there was no estimated salvage value. Management estimates that about 40% of the projects of the research and development group will result in long-term benefits (i.e., at least 10 years) to the corporation. The remaining projects either benefit the current period or are abandoned before completion. A summary of the number of projects and the direct costs incurred in conjunction with the research and development activities for 2014 appears below. Number of Projects Salaries and Employee Benefits Other Expenses (excluding Building Depreciation Charges) Completed projects with long-term benefits Abandoned projects or projects that benefit the current period Projects in processresults indeterminate 10 $ 83,000 $60,000 16 8 135,000 64,000 67,000 26,000 Total 34 $282,000 $153,000 Upon recommendation of the research and development group, Oak Company acquired a patent for manufacturing rights at a cost of $180,000. The patent was acquired on April 1,2013, and has an economic life of 8 years. Instructions If generally accepted accounting principles were followed, how would the items above relating to research and development activities be reported on the following financial statements? (a) The company's income statement for 2014. (b) The company's balance sheet as of December 31, 2014. Be sure to give account titles and amounts, and briefly justify your presentation. (CMA adapted) 6 7 P12-5B (Goodwill, Impairment) On March 31, 2014, Rodeo Company paid $6,000,000 to acquire all of the common stock of Drive Incorporated, which became a division of Rodeo. Drive reported the following balance sheet at the time of the acquisition. Current assets Noncurrent assets Total assets $2,400,000 3,200,000 $5,600,000 Current liabilities Long-term liabilities Stockholders' equity Total liabilities and equity $ 500,000 300,000 4,800,000 $5,600,000 It was determined at the date of the purchase that the fair value of the identifiable net assets of Drive was $4,500,000. Over the next 9 months of operations, the newly purchased division experienced operating c12BProblems.indd Page 3 17/10/12 9:34 PM user-f409 B Problems 3 losses. In addition, it now appears that it will generate substantial losses for the foreseeable future. At December 31,2014, Drive reports the following balance sheet information. Current assets Noncurrent assets (including goodwill recognized in purchase) Current liabilities Long-term liabilities $1,600,000 3,800,000 (600,000) (400,000) Net assets $4,400,000 It is determined that the fair value of the Drive Division is $4,500,000. The recorded amount for Drive's net assets (excluding goodwill) is the same as fair value, except for property, plant, and equipment, which has a fair value $100,000 above the carrying value. Instructions (a) Compute the amount of goodwill recognized, if any, on March 31,2014. (b) Determine the impairment loss, if any, to be recorded on December 31, 2014. (c) Assume that fair value of the Drive Division is $4,000,000 instead of $4,500,000. Determine the impairment loss, if any, to be recorded on December 31, 2014. (d) Prepare the journal entry to record the impairment loss, if any, and indicate where the loss would be reported in the income statement. 2 6 3 7 10 P12-6B (Comprehensive Intangible Assets) Pacific Inc. was formed on July 1, 2012 when Roy Clemons purchased the Coastal Bike Company. Coastal Bike organizes and provides bike tours along U.S. coastal areas. Clemons paid $350,000 cash for Coastal Bike. At the time, Coastal Bike's balance sheet reported assets of $400,000 and liabilities of $300,000 (thus stockholders equity was $100,000). The fair value of Coastal Bike's assets is estimated to be $540,000. Included in the assets is the Coastal Bike trade name with a fair value of $60,000 and a copyright on some tour books with a fair value of $20,000. The trade name has a remaining life of 10 years and can be renewed at nominal cost indefinitely. The copyright has a remaining life of 20 years. Instructions (a) Prepare the intangible assets section of Pacific Inc. at December 31,2012. How much amortization expense is included in Montana Matt's income for the year ended December 31,2012? Show all supporting computations. (b) Prepare the journal entry to record amortization expense for 2013. Prepare the intangible assets section of Pacific Inc. at December 31, 2013. (No impairments are required to be recorded in 2013.) (c) At the end of 2014, Clemons is evaluating the results of the tour business. Due to fierce competition from other online businesses, the Coastal Bike reporting unit has been losing money. Its book value is now $225,000. The fair value of the Coastal Bike reporting unit is $150,000. The implied value of goodwill is $35,000. Clemons has collected the following information related to the company's intangible assets. Intangible Asset Trademark Copyrights Expected Cash Flows (Undiscounted) Fair Values 45,000 26,000 16,000 14,000 Prepare the journal entries required, if any, to record impairments on Pacific's intangible assets. (Assume that any amortization for 2014 has been recorded.) Show supporting computations