3 (Accounting for Franchise, Patents, and Trade Name) Information concerning Haerhpin Corporation’s intangible assets is as follows. 1. On January 1, 2007, Haerhpin signed an agreement to operate as a franchisee of Hsian Copy Service, Inc. for an initial franchise fee of $75,000. Of this amount, $15,000 was paid when the agreement was signed, and the balance is payable in 4 annual payments of $15,000 each, beginning January 1, 2008. 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, 2007, of the 4 annual payments discounted at 14% (the implicit rate for a loan of this type) is $43,700. The agreement also provides that 5% of the revenue from the franchise must be paid to the franchisor annually. Haerhpin’s revenue from the franchise for 2007 was $950,000. Haerhpin estimates the useful life of the franchise to be 10 years. (Hint: You may want to refer to Appendix 18A to determine the proper accounting treatment for the franchise fee and payments.) 2. Haerhpin incurred $65,000 of experimental and development costs in its laboratory to develop a patent that was granted on January 2, 2007. Legal fees and other costs associated with registration of the patent totaled $13,600. Haerhpin estimates that the useful life of the patent will be 8 years. 3. A trademark was purchased from Shanghai Company for $32,000 on July 1, 2004. Expenditures for successful litigation in defense of the trademark totaling $8,160 were paid on July 1, 2007. Haerhpin estimates that the useful life of the trademark will be 20 years from the date of acquisition. Instructions (a) Prepare a schedule showing the intangible assets section of Haerhpin’s balance sheet at December 31, 2007. Show supporting computations in good form. (b) Prepare a schedule showing all expenses resulting from the transactions that would appear on Haerhpin’s income statement for the year ended December 31, 2007. Show supporting computations in good form.
| (a) | Haerhpin Corporation | ||
| Intangible Assets | |||
| December 31, 2002 | |||
| Franchise, net of accumulated amortization of $5,870 | |||
| (Schedule 1) | $52,830 | ||
| Patent, net of accumulated amortization of $1,700 | |||
| (Schedule 2) | 11,900 | ||
| Trademark, net of accumulated amortization of $5,840 | |||
| (Schedule 3) | 34,320 | ||
| Total intangible assets | $99,050 | ||
| Schedule 1 Franchise | |||
| Cost of franchise on 1/1/02 ($15,000 + $43,700) | $58,700 | ||
| 2002 amortization ($58,700 X 1/10) | (5,870) | ||
| Cost of franchise, net of amortization | $52,830 | ||
| Schedule 2 Patent | |||
| Cost of securing patent on 1/2/02 | $13,600 | ||
| 2002 amortization ($13,600 X 1/8) | (1,700) | ||
| Cost of patent, net of amortization | $11,900 | ||
| Schedule 3 Trademark | |||
| Cost of trademark on 7/1/99 | $32,000 | ||
| Amortization, 7/1/99 to 7/1/02 ($32,000 X 3/20) | (4,800) | ||
| Book value on 7/1/02 | 27,200 | ||
| Cost of successful legal defense on 7/1/02 | 8,160 | ||
| Book value after legal defense | 35,360 | ||
| Amortization, 7/1/02 to 12/31/02 ($35,360 X 1/17 X 6/12) | (1,040) | ||
| Cost of trademark, net of amortization | $34,320 | ||
| (b) | Haerhpin Corporation | |
| Expenses Resulting from Selected Intangible Assets Transactions | ||
| For the Year Ended December 31, 2002 | ||
| Interest expense ($43,700 X 14%) | $ 6,118 | |
| Franchise amortization (Schedule 1) | 5,870 | |
| Franchise fee ($950,000 X 5%) | 47,500 | |
| Patent amortization (Schedule 2) | 1,700 | |
| Trademark amortization (Schedule 4) | 1,840 | |
| Total intangible assets | $63,028 | |
Note: The $65,000 of research and development costs incurred in developing the patent would have been expensed per FASB No. 2 prior to 2002.
| Schedule 4 Trademark Amortization | |
| Amortization, 1/1/02 to 6/30/02 ($32,000 X 1/20 X 6/12) | $ 800 |
| Amortization, 7/1/02 to 12/31/02 ($35,360 X 1/17 X 6/12) | 1,040 |
| Total trademark amortization | $1,840 |
