For Each Of The Following Unrelated Situations, Calculate The Annual Amortization Expense And Prepare A Journal Entry To Record The Expense:

Amortization Expense - For Each Of The Following Unrelated Situations, Calculate The Annual Amortization Expense And Prepare A Journal Entry To Record The Expense: 1. A Patent With A 10-Year Remaining Legal Life Was Purchased For $350,000. The Patent Will Be Commercially Exploitable For Another Eight Years. 2. A Patent Was Acquired On A Device Designed By A Production Worker. Although The Cost Of The Patent To Date Consisted Of $52,300 In Legal Fees For Handling The Patent Application, The Patent Should Be Commercially Valuable During Its Entire Remaining Legal Life Of 10 Years And Is Currently Worth $400,000. 3. A Franchise Granting Exclusive Distribution Rights For A New Solar Water Heater Within A Three-State Area For Five Years Was Obtained At A Cost Of $70,000. Satisfactory Sales Performance Over The Five Years Permits Renewal Of The Franchise For Another Three Years (At An Additional Cost Determined At Renewal).
Answers Of Three Questions

Here, we need to calculate Amortization Expense (AE) for Patent and Franchise and then record the Adjusting Journal Entry for such expense for the year under three different scenarios. We also record Accumulated Amortization (AA) for these Intangible Assets which are Contra Assets Accounts and decrease the values of these kinds of intangible assets on balance sheet.

1. A Patent With A 10-Year Remaining Legal Life Was Purchased For $350,000. The Patent Will Be Commercially Exploitable For Another Eight Years.

Given:

Useful Life = 8 Years (as the patent will be valuable in the market for 8 years, so useful life is revised by the company which is now 8 years instead of 10 years)

Cost of Patent = $350,000

Salvage Value = $0

Required:

Annual Amortization Expense (AAE) = ?

Journal Entry To Record Expense = ?

We know that:

Annual Amortization Expense = Cost - Salvage Value / Useful Life = $350,000 - 0 / 8 = $43,750

Journal Entry:

                   Amortization Expense a/c $43,750

                                                              Accumulated Amortization - Patent a /c $43,750

                             (Part Of Cost Of Patent Charged To Expense For The Current Year)

2. A Patent Was Acquired On A Device Designed By A Production Worker. Although The Cost Of The Patent To Date Consisted Of $52,300 In Legal Fees For Handling The Patent Application, The Patent Should Be Commercially Valuable During Its Entire Remaining Legal Life Of 10 Years And Is Currently Worth $400,000.

Given:

Cost = $52,300

Salvage Value = $0

Market Value of $400,000 is not required in our calculation of AAE

Useful Life of Patent = 10 Years

The formula to compute AAE is shown below:

AAE = Cost - Salvage Value / Useful Life = $52,300 - 0 / 10 = $5,230

Journal Entry:

                                    AE a/c $5,230

                                                      AA - Patent a /c $5,230

                   (Annual Amortization Expense Recorded For The Current Year)

3. A Franchise Granting Exclusive Distribution Rights For A New Solar Water Heater Within A Three-State Area For Five Years Was Obtained At A Cost Of $70,000. Satisfactory Sales Performance Over The Five Years Permits Renewal Of The Franchise For Another Three Years (At An Additional Cost Determined At Renewal).

We are given the following data as shown below:

Cost of Franchise = $70,000

Useful Life = 5 Years (as franchise is valuable for 5 years and it will renew after five years but the cost is not yet determined which is determined at renewal)

Salvage Value = $0

To find out AAE, we know the following formula as shown below:

AAE = Cost - Salvage Value / Useful Life = $70,000 - 0 / 5 = $14,000

Journal Entry:

                                                 AE a/c $14,000

                                                            AA - Franchise a /c $14,000

                                  (Franchise Amortization Expense Per Year Recorded)

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