(L01,2,5) (Accounting for Patents, Franchises, and R&D) Carter Company has provided information on intangible assets as follows.

A patent was purchased from Ford Company for $2,000,000 on January 1, 2016. Carter estimated the remaining useful life of the patent to be 10 years. The patent was carried in Ford’s accounting records at a net book value of $2,000,000 when Ford sold it to Carter.

During 2017, a franchise was purchased from Polo Company for $480,000. In addition, 5% of revenue from the franchise must be paid to Polo. Revenue from the franchise for 2017 was $2,500,000. Carter estimates the useful life of the franchise to be 10 years and takes a full year’s amortization in the year of purchase.

Carter incurred research and development costs in 2017 as follows.

Materials and equipment $142,000 Personnel 189,000 Indirect costs 102,000

$433,000 Carter estimates that these costs will be recouped by December 31, 2020. The materials and equipment purchased have no alternative uses.

On January 1, 2017, because of recent events in the field, Carter estimates that the remaining life of the patent purchased on January 1, 2016, is only 5 years from January 1, 2017.

Instructions

(a) Prepare a schedule showing the intangibles section of Carter’s balance sheet at December 31, 2017. Show supporting computations in good form.

(b) Prepare a schedule showing the income statement effect (related to expenses) for the year ended December 31, 2017, as a result of the facts above. Show supporting computations in good form.

(AICPA adapted)