Question

The intangible assets section of Sheffield Company at December 31, 2020, is presented below.

Patents ($90,000 cost less $9,000 amortization) $81,000
Franchises ($35,000 cost less $14,000 amortization) 21,000
Total $102,000
The patent was acquired in January 2020 and has a useful life of 10 years. The franchise was acquired in January 2017 and also has a useful life of 10 years. The following cash transactions may have affected intangible assets during 2021.
Jan. 2 Paid $18,000 legal costs to successfully defend the patent against infringement by another company.
Jan.–June Developed a new product, incurring $149,000 in research and development costs. A patent was granted for the product on July 1. Its useful life is equal to its legal life.
Sept. 1 Paid $50,000 to an extremely large defensive lineman to appear in commercials advertising the company’s products. The commercials will air in September and October.
Oct. 1 Acquired a franchise for $130,000. The franchise has a useful life of 50 years.
Prepare journal entries to record the 2021 amortization expense. (Credit account titles are automatically indented when amount is entered. Do not indent manually. Record journal entries in the order presented in the problem. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Answer 1

To record 2021's amortization expense for Sheffield Company's patents and franchises, calculations are made using the straight-line method. The annual amortization expense is calculated for each intangible asset based on its respective useful life, and the monthly or yearly expense is recorded accordingly.

Step-by-step explanation:

The question requires preparing journal entries for the year 2021 to record amortization expense for Sheffield Company's intangible assets. The amortization expense is calculated using the straight-line method, which involves subtracting any salvage value from the asset's cost and dividing it by the useful life of the asset. For the patents and franchises, no salvage value is assumed.

For the patent with a 10-year useful life acquired in January 2020, the annual amortization expense would be (Patent original cost - Accumulated amortization)/Useful life. This calculation results in ($90,000 - $9,000)/10 years = $8,100 of annual amortization expense, which when divided by 12 provides a monthly expense to be recorded.

The franchise acquired in January 2017 with a 10-year useful life would have an annual amortization expense calculated as (Franchise original cost - Accumulated amortization)/Useful life. The expense amounts to ($35,000 - $14,000)/10 years = $2,100 annually.

The newly acquired franchise in October 2021 with a 50-year useful life will have an annual amortization expense of $130,000/50 years = $2,600. However, since it was acquired in October, only three months of amortization will be recorded in 2021.