On June 30, 2017, your client, Ferry Company, was granted two patents covering plastic cartons that it had been producing and marketing profitably for the past 3 years. One patent covers the manufacturing process, and the other covers the related products.

Ferry executives tell you that these patents represent the most significant breakthrough in the industry in the past 30 years. The products have been marketed under the registered trademarks Evertight, Duratainer, and Sealrite. Licenses under the patents have already been granted by your client to other manufacturers in the United States and abroad, and are producing substantial royalties.

On July 1, Ferry commenced patent infringement actions against several companies whose names you recognize as those of substantial and prominent competitors. Ferry’s management is optimistic that these suits will result in a permanent injunction against the manufacture and sale of the infringing products as well as collection of damages for loss of profits caused by the alleged infringement.

The financial vice president has suggested that the patents be recorded at the discounted value of expected net royalty receipts.

Instructions

• a. What is the meaning of “discounted value of expected net receipts”? Explain.
• b. How would such a value be calculated for net royalty receipts?
• c. What basis of valuation for Ferry’s patents would be generally accepted in accounting? Give supporting reasons for this basis.
• d. Assuming no practical problems of implementation and ignoring generally accepted accounting principles, what is the preferable basis of valuation for patents? Explain.
• e. What would be the preferable theoretical basis of amortization? Explain.
• f. What recognition, if any, should be made of the infringement litigation in the financial statements for the year ending September 30, 2017? Discuss.

Explain how losses on impaired intangible assets should be reported in income.

More Company incurred the following costs during the current year in connection with its research and development activities.

$$\begin{array}{lrr} \text{Cost of equipment acquired that will have alternative}\\ \hspace{10pt}\text{uses in future R\&D projects over the next 5 years}&&\text{}\\ \hspace{10pt}\text{(uses straight-line depreciation)}&&\$\hspace{15pt}\text{280,000}\\ \text{Materials consumed in R\&D projects}&&\text{59,000}\\ \text{Consulting fees paid to outsiders for R\&D projects}&&\text{100,000}\\ \text{Personnel costs of persons involved in R\&D projects }&&\text{128,000}\\ \text{Indirect costs reasonably allocable to R\&D projects }&&\text{50,000}\\ \text{Materials purchased for future R\&D projects}&&\text{34,000}\\ \end{array}$$

Compute the amount to be reported as research and development expense by More on its current year income statement. Assume equipment is purchased at the beginning of the year.

Last year, Zeno Company recorded an impairment on an intangible asset held for use. Recent appraisals indicate that the asset has increased in value. Should Zeno record this recovery in value?

Price Company from time to time embarks on a research program when a special project seems to offer possibilities. In 2016, the company expends $325,000 on a research project, but by the end of 2016 it is impossible to determine whether any benefit will be derived from it.

Instructions

• a. What account should be charged for the$325,000, and how should it be shown in the financial statements?
• b. The project is completed in 2017, and a successful patent is obtained. The R&D costs to complete the project are $110,000. The administrative and legal expenses incurred in obtaining patent number 472-1001-84 in 2017 total$16,000. The patent has an expected useful life of 5 years. Record these costs in journal entry form. Also, record patent amortization (full year) in 2017.
• c. In 2018, the company successfully defends the patent in extended litigation at a cost of $47,200, thereby extending the patent life to December 31, 2025. What is the proper way to account for this cost? Also, record patent amortization (full year) in 2018.
• d. Additional engineering and consulting costs incurred in 2018 required to advance the design of a product to the manufacturing stage total$60,000. These costs enhance the design of the product considerably. Discuss the proper accounting treatment for this cost.

Angelou Corporation was organized in 2016 and began operations at the beginning of 2017. The company is involved in interior design consulting services. The following costs were incurred prior to the start of operations.

$$\begin{array}{lrr} \text{Attorney fees in connection with organization of the company}&\text{\$\hspace{5pt}15,000}\\ \text{Purchase of drafting and design equipment}&{\text{10,000}}\\ \text{Costs of meetings of incorporators to discuss organizational activities}&\text{7,000}\\ \text{State filing fees to incorporate}&\underline{\text{\hspace{15pt}1,000}}\\ \text{}&\text{\underline{\underline{\$\hspace{5pt}33,000}}}\\ \end{array}$$

Instructions

• a. Compute the total amount of organization costs incurred by Angelou.
• b. Prepare the journal entry to record organization costs for 2017.

Braxton Inc. is considering the write-off of a limited-life intangible because of its lack of profitability. Explain to the management of Braxton how to determine whether a write-off is permitted.

In examining financial statements, financial analysts often write off goodwill immediately. Comment on this procedure.

Presented below is net asset information related to the Carlos Division of Santana, Inc.

$$\begin{array}{c} \textbf{CARLOS DIVISION}\\ \textbf{NET ASSETS}\\ \textbf{AS OF DECEMBER 31, 2017}\\ \textbf{(IN MILLIONS)}\\ \end{array}$$

$$\begin{array}{lrr} \text{Cash}&\text{\$\hspace{15pt}50}\hspace{4pt}\\ \text{Accounts receivable}&{\text{200}\hspace{4pt}}\\ \text{Property, plant, and equipment (net)}&{\text{2,600}\hspace{4pt}}\\ \text{Goodwill}&\text{200}\hspace{4pt}\\ \text{Less: Notes payable}&\underline{\text{\hspace{5pt}(2,700)}}\\ \text{Net assets}&\text{\underline{\underline{\$\hspace{12pt}350}}\hspace{3pt}}\\ \end{array}$$

The purpose of the Carlos Division is to develop a nuclear-powered aircraft. If successful, traveling delays associated with refueling could be substantially reduced. Many other benefits would also occur. To date, management has not had much success and is deciding whether a write-down at this time is appropriate. Management estimated its future net cash flows from the project to be $400 million. Management has also received an offer to purchase the division for$335 million. All identifiable assets’ and liabilities’ book and fair value amounts are the same.

Instructions

• a. Prepare the journal entry (if any) to record the impairment at December 31, 2017.
• b. At December 31, 2018, it is estimated that the division’s fair value increased to $345 million. Prepare the journal entry (if any) to record this increase in fair value.

Indicate whether the following items are capitalized or expensed in the current year. a. Purchase cost of a patent from a competitor. b. Research and development costs. c. Organizational costs. d. Costs incurred internally to create goodwill.

Under what circumstances is it appropriate to record goodwill in the accounts? How should goodwill, properly recorded on the books, be written off in order to conform with generally accepted accounting principles?

Presented below is information related to copyrights owned by Mare Company at December 31, 2017.

$$\begin{array}{lrr} \text{Cost}&\text{\$\hspace{5pt}8,600,000}\\ \text{Carrying amount}&\text{4,300,000}\\ \text{Expected future net cash flows}&\text{4,000,000}\\ \text{Fair value}&\text{3,200,000}\\ \end{array}$$

Assume that Mare Company will continue to use this copyright in the future. As of December 31, 2017, the copyright is estimated to have a remaining useful life of 10 years.

Instructions

• a. Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2017. The company does not use accumulated amortization accounts.
• b. Prepare the journal entry to record amortization expense for 2018 related to the copyrights.
• c. The fair value of the copyright at December 31, 2018, is $3,400,000. Prepare the journal entry (if any) necessary to record the increase in fair value.

On July 1, 2017, Brigham Corporation purchased Young Company by paying $250,000 cash and issuing a$100,000 note payable to Steve Young. At July 1, 2017, the balance sheet of Young Company was as follows.

$$\begin{array}{lrlr} \text{Cash}&\text{\$\hspace{10pt}50,000}&\text{Accounts payable}&\text{\$\hspace{10pt}200,000}\\ \text{Accounts receivable}&\text{90,000}&\text{Stockholders’ equity}&\underline{\text{\hspace{15pt}235,000}}\\ \text{Inventory}&\text{100,000}&\text{}&\text{\underline{\underline{\$\hspace{10pt}435,000}}}\\ \text{Land}&\text{40,000}\\ \text{Buildings (net)}&\text{75,000}\\ \text{Equipment (net)}&\text{70,000}\\ \text{Trademarks}&\underline{\text{\hspace{15pt}10,000}}\\ \text{}&\text{\underline{\underline{\$\hspace{5pt}435,000}}}\\ \end{array}$$

The recorded amounts all approximate current values except for land (fair value of $60,000), inventory (fair value of$125,000), and trademarks (fair value of $15,000).

Instructions

• a. Prepare the July 1 entry for Brigham Corporation to record the purchase.
• b. Prepare the December 31 entry for Brigham Corporation to record the amortization of intangibles. The trademark has an estimated useful life of 4 years with a residual value of$3,000.

What is goodwill? What is a bargain purchase?