Reichenbach Co., organized in 2009, has set up a single account for all intangib
ID: 2428122 • Letter: R
Question
Reichenbach Co., organized in 2009, has set up a single account for all intangible assets. The following summary discloses the debit entries that have been recorded during 2009 and 2010.
Intangible Assets
7/1/09 8-year franchise; expiration date 6/30/17 $48,000
10/1/09 Advance payment on laboratory space (2-year lease) 24,000
12/31/09 Net loss for 2009 including state incorporation fee, $1,000,
and related legal fees of organizing, $5,000 (all fees
incurred in 2009) 16,000
1/2/10 Patent purchased (10-year life) 84,000
3/1/10 Cost of developing a secret formula (indefinite life) 75,000
4/1/10 Goodwill purchased (indefinite life) 278,400
6/1/10 Legal fee for successful defense of patent purchased above 12,650
9/1/10 Research and development costs 160,000
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, 2010, recording any necessary amortization and reflecting all balances accurately as of that date. (Ignore income tax effects.) (List multiple debit/credit entries from largest to smallest amount, e.g. 10, 5, 2.)
Explanation / Answer
Here is my reasoning: Franchises-------------------------------------------------48,000 Prepaid Rent----------------------------------------------24,000 Retained Earnings (Organization Costs of $6,000 in 2009)------------------------------------------6,000 Retained Earnings ($16,000 – $6,000)-------------------10,000 Patents ($84,000 + $12,650)------------------------------96,650 Research and Development Expense ($75,000 + $160,000)-----------------------------------235,000 Goodwill---------------------------------------------------278,400 Intangible Assets------------------------------------ 698,050 Franchise Amortization Expense ($48,000 ÷ 8)---------6,000 Retained Earnings ($48,000 ÷ 8 X 6/12)-----------------3,000 Franchises-------------------------------------------- 9,000 Rent Expense ($24,000 ÷ 2)-------------------------------12,000 Retained Earnings ($24,000 ÷ 2 X 3/12)------------------3,000 Prepaid Rent----------------------------------------- 15,000 Patent Amortization Expense-----------------------------9,170 Patents------------------------------------------------9,170 ($84,000 ÷ 10) + ($12,650 X 7/115)=9170 Note: No amortization of goodwill; goodwill should be tested for impairment on at least an annual basis in future periods.