P12-3 (Accounting for Franchise, Patents, and Trade Name) Information concerning Sandro Corporation’s
intangible assets is as follows.
1. On January 1, 2010, Sandro 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,
2011. 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, 2010, 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. Sandro’s revenue
from the franchise for 2010 was $900,000. Sandro 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. Sandro incurred $65,000 of experimental and development costs in its laboratory to develop a
patent that was granted on January 2, 2010. Legal fees and other costs associated with registration
of the patent totaled $17,600. Sandro estimates that the useful life of the patent will be
8 years.
3. A trademark was purchased from Shanghai Company for $36,000 on July 1, 2007. Expenditures for
successful litigation in defense of the trademark totaling $10,200 were paid on July 1, 2010. Sandro
estimates that the useful life of the trademark will be 20 years from the date of acquisition.
Instructions
(a) Prepare a schedule showing the intangible assets section of Sandro’s balance sheet at December
31, 2010. Show supporting computations in good form.
(b) Prepare a schedule showing all expenses resulting from the transactions that would appear on
Sandro’s income statement for the year ended December 31, 2010. Show supporting computations
in good form.
(a) Prepare a schedule showing the intangible assets section of Sandro’s balance sheet at December
31, 2010. Show supporting computations in good form.
Franchise, net of accumulated amortization
52,830$
(Working 1)
Patent, net of accumulated amortization
15,400$
(Working 2)
Trademark, net of accumulated amortization
39,600$
(Working 3)
Total Tangible Assets
107,830
$
WORKING
1
Franchise
Cost of franchise on 1/1/10 (43,700 + 15,000)
58,700$
Amortization for the year 2010 ($58,700 X 1/10)
(5,870)$
Cost of franchise, net of amortization
52,830$
2
Patent
Cost of securing patent on Jan 02,2010
17,600$
2010 amortization ($17,600 X 1/8)
(2,200)$
Cost of patent, net of amortization
15,400$
3
Trademark
Cost of trademark on July 01,2007
36,000$
Amortization, 7/1/7 to 7/1/10 ($36,000 X 3/20)
(5,400)$
Book value on 7/1/10
30,600$
Cost of successful legal defense on 7/1/10
10,200$
Book value after legal defense
40,800$
Amortization, 7/1/02 to 12/31/10
(1,200)$
($40,800 X 1/17 X 6/12)
Cost of trademark, net of amortization
39,600$
(b) Prepare a schedule showing all expenses resulting from the transactions that would appear on
Sandro’s income statement for the year ended December 31, 2010. Show supporting computations
in good form.
SANDRO CORPORATION
Intangible Assets
31-Dec-10
Interest expense ($43,700 X 14%)
6,118$
Franchise amortization (working 1)
5,870$
Franchise fee ($900,000 X 5%)
45,000$
Patent amortization (working 2)
2,200$
Trademark amortization (Working 4)
2,100$
Total intangible assets expenses
61,288$
WORKING
4
Trademark amortization
Amortization for Jan - June 2010 ($36,000 X 3/20)
900$
Amortization, 7/1/02 to 12/31/10
1,200$
Trademark amortization
2,100$
for the year ended December 31, 2010
SANDRO CORPORATION
Expenses Resulting from Selected Intangible Assets Transactions
