Expenditure and Amortization

Brief Exercise 12-2

Celine Dion Corporation purchases a patent from Salmon Company on January 1, 2014, for $54,050. The patent has a remaining legal life of 16 years. Celine Dion feels the patent will be useful for 10 years. Assume that at January 1, 2016, the carrying amount of the patent on Celine Dion’s books is $43,240. In January, Celine Dion spends $27,800 successfully defending a patent suit. Celine Dion still feels the patent will be useful until the end of 2023.

Prepare the journal entries to record the $27,800 expenditure and 2016 amortization.

Expenditure of Patents

Debit

Credit

Patent

Cash

$27,800

The patent has now a carrying value of ($43,240 + $27,800) = $71,040

The patent has eight more years of useful life. Therefore, amortizing expense is $71,040×1/8 =$8,880

Amortization Expense

Debit

Credit

Amortization Expense

Patent

$8,880

Brief Exercise 12-5

On September 1, 2014, Winans Corporation acquired Aumont Enterprises for a cash payment of $700,130. At the time of purchase, Aumont’s balance sheet showed assets of $605,090, liabilities of $199,950, and owners’ equity of $405,140. The fair value of Aumont’s assets is estimated to be $818,000.

Compute the amount of goodwill acquired by Winans.

Purchase price $700,130

Fair value of assets $818,000

Fair value of liabilities $199,950

Fair value of net assets $618,050

Value assigned to goodwill $82,080

Fair value of net assets= total assets – total liability

=$818,000 – $199,950 = $618,050

Goodwill= (Considerations paid + fair value of uncontrolled interest) – (assets acquired –liabilities assumed)

= $700,130 – $618,050 = $82,080

Problem 12-2

Fields Laboratories holds a valuable patent (No. 758-6002-1A) on a precipitator that prevents certain types of air pollution. Fields does not manufacture or sell the products and processes it develops. Instead, it conducts research, 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 Fields patent number 758-6002-1A is as follows.

Date	Activity	Cost
2005–2006	Research conducted to develop precipitator	$382,720
Jan. 2007	Design and construction of a prototype	88,080
March 2007	Testing of models	56,560
Jan. 2008	Fees paid engineers and lawyers to prepare patent
	application; patent granted June 30, 2008	87,210
Nov. 2009	Engineering activity necessary to advance the design
	of the precipitator to the manufacturing stage	82,710
Dec. 2010	Legal fees paid to successfully defend precipitator patent	56,560
April 2011	Research aimed at modifying the design of the
	patented precipitator	58,180
July 2015	Legal fees paid in unsuccessful patent infringement suit
	against a competitor	47,780

Fields assumed a useful life of 17 years when it received the initial precipitator patent. On January 1, 2013, it revised its useful life estimate downward to 5 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.

Compute the carrying value of patent No. 758-6002-1A on each of the following dates:

December 31, 2008

Costs paid to obtain patent Jan 2008 $87,210

2008 amortization $87,210/17 years $5,130

Carrying value, 12/31/08 $82,080

December 31, 2012

Carrying value of patent Jan 1, 2009 $82,080

Amortization 2009 $5,130

Amortization 2010 $5,130 ($10,260)

$71,820

Legal fee to defend patent Dec 2010 $56,560

Carrying value, Dec 31, 2010 $128,380

Amortization 2011 $128,380/14 years $9,170

Amortization 2012 $9,170 ($18,340)

Carrying value Dec 31, 2012 $110,040

December 31, 2015

Carrying value Jan 1, 2013 $110,040

Amortization 2013 $110,040/5years $22,008

Amortization 2014 $22,008

Amortization 2015 $22,008 ($66,024)

Carrying value, Dec 31, 2015 $44,016

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