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 \$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 \$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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