The Barb Company has provided information on intangible assets as follows:
1. A patent was purchased from the Lou Company for $1,500,000 on January 1, 2006. Barb estimated the remaining useful life of the patent to be 10 years. The patent was carried in Lou’s accounting records at a net book value of $1,250,000 when Lou sold it to Barb.
2. During 2007, a franchise was purchased from the Rink Company for $500,000. In addition, 5% of revenue from the franchise must be paid to Rink. Revenue from the franchise for 2007 was $2,000,000. Barb estimates the useful life of the franchise to be 10 years and takes a full year’s amortization in the year of purchase.
3. Barb incurred research and development costs in 2007 as follows:
Materials and equipment ……….. $120,000
Personnel ………………………… 140,000
Indirect costs ……………………… 60,000
Barb estimates that these costs will be recouped by December 31, 2008.
4. On January 1, 2007 Barb, based on new events that have occurred in the field, estimates that the remaining life of the patent purchased on January 1, 2006 is only five years from January 1, 2007.
1. Prepare a schedule showing the intangibles section of Barb’s balance sheet at December 31, 2007. Show supporting computations in good form.
2. Prepare a schedule showing the income statement effect for the year ended December 31, 2007 as a result of the previously mentioned facts. Show supporting computations in good form.