On June 30, 2007 your client, Sprauge Corporation, was granted two patents covering plastic cartons that it has been producing and marketing profitably for the past three years. One patent covers the manufacturing process and the other covers the related products.
Sprauge 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 Safetainer, Duratainer, and Seal rite. Your client has already granted licenses under the patents to other manufacturers in the United States and abroad and they are producing substantial royalties.
On July 1 Sprauge commenced patent infringement actions against several companies whose names you recognize as those of substantial and prominent competitors. Sprauge management is optimistic that these suits will result in a permanent injunction against the manufacture and sale of the infringing products and 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.

Required
1. Explain the meaning of discounted value of expected net receipts.
2. How would such a value be calculated for net royalty receipts?
3. Explain the basis of valuation of Sprauge’s patents that would be generally accepted in accounting.
4. Assuming no practical problems of implementation and ignoring generally accepted accounting principles, explain the preferable basis of valuation for patents.
5. Explain what would be the preferable theoretical basis of amortization.
6. Explain what recognition, if any, the company should make of the infringement litigation in the financial statements for the year ending September 30, 2007.