Question

On January 1, 2025, Sandhill Co. had a balance of 432,000 of goodwill on its balance sheet that resulted from the purchase of a small business in a prior year. The goodwill had an indefinite life. During 2025, the company had the following additional transactions:

- January 2: Purchased a patent (5-year life) for336,000.
- July 1: Acquired a 9-year franchise; expiration date July 1, 2034; cost 648,000.
- September 1: Research and development costs of222,000.

Prepare the necessary entries to record the transactions related to intangibles. All costs incurred were for cash. (List debit entry before credit entry. Record entries in the order displayed in the problem statement. Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select 'No entry' for the account titles and enter '0' for the amounts.)

Answer 1

The necessary accounting entries for the transactions related to intangibles include debiting Patents and Franchise for the purchase amounts and crediting Cash, and debiting Research and Development Expense for the R&D costs, crediting Cash. Goodwill is not amortized as it has an indefinite life.

Step-by-step explanation:

When handling intangible assets such as goodwill, patents, and franchises, accounting entries must accurately reflect the acquisition and amortization of these assets. On January 1, 2025, Sandhill Co. already had a balance of goodwill, which is not amortized because it has an indefinite life. Here are the necessary entries for the additional transactions:

• January 2: Purchased a patent with a 5-year life for $336,000.
  Debit: Patents $336,000
  Credit: Cash $336,000

• July 1: Acquired a 9-year franchise; cost $648,000.
  Debit: Franchise $648,000
  Credit: Cash $648,000

• September 1: Incurred research and development costs of $222,000.
  Debit: Research and Development Expense $222,000
  Credit: Cash $222,000
  
  No amortization entry is needed for research and development costs as they are expensed as incurred.

Note: The patent and franchise will need to be amortized over their respective useful lives in subsequent accounting periods.