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3 January, 11:19

Gill Company, organized in 2017, has the following transactions related to intangible assets. 1/2/17 Purchased patent (5-year life) $385,0004/1/17 Goodwill purchased (indefinite life) 360,0007/1/17 12-year franchise; expiration date 7/1/2,029 408,0009/1/17 Research and development costs 176,000a. Prepare the necessary entries to record these intangibles. All costs incurred were for cash. Make the adjusting entries as of December 31, 2017, recording any necessary amortization. b. Calculate ending balances as at 12/31/17.

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  1. 3 January, 14:54
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    Dr Amortization Expense $94,000 ($77k + $15k)

    Cr Accumulated Amortization - Patents $77,000

    Cr Accumulated Amortization - Franchise $17,000

    The ending balance are given as under:

    Patents ($385k - $77k) $308,000

    Goodwill Purchased $360,000

    Franchise ($408k - $17) $391,000

    Research and development costs $176,000

    Explanation:

    The amortization expense can be calculated as under:

    Amortization Expense = Cost / Useful Life

    Here

    Cost of the patent is $385,000 and its useful life is 5 years.

    By putting values, we have:

    Amortization Expense = $385,000 / 5 Years = $77,000

    Now we will calculate the amortization expense of the franchise by simply putting values in the above amortization formula. Here the cost of the franchise is $408,000 and its useful life is 12 years.

    By putting values, we have:

    Amortization Expense = $408,000 / 12 Years = $34,000

    This franchise was purchased on first July, which means that the amortization must be for 6 months which is half of the complete year amortization.

    So

    Amortization for 6 months = $34,000 * 6 / 12 = $34,000 * 1 / 2 = $17,000

    Double Entry

    Now the double entry of $77,000 and $17,000 amortization would be recognized as under:

    Dr Amortization Expense $94,000 ($77k + $15k)

    Cr Accumulated Amortization - Patents $77,000

    Cr Accumulated Amortization - Franchise $17,000

    The ending balance are given as under:

    Patents ($385k - $77k) $308,000

    Goodwill Purchased $360,000

    Franchise ($408k - $17) $391,000

    Research and development costs $176,000
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