Intangibles: Balance Sheet Presentation and Income Statement Effects

Valen Company has provided information on intangible assets as follows:

A patent was purchased from Lou Company for $$1,500,000$ on January $1,$ Year $1.$ Valen estimated the remaining useful life of the patent to be $15$ years. The patent was carried in Lou's accounting records at a net book value of $$1,270,000$ when Lou sold it to Valen.

During Year $2,$ a franchise was purchased from Rink Company for $$400,000.$ In addition, $4\%$ of revenue from the franchise must be paid to Rink. Revenue from the franchise for Year $2$ was $$1,600,000.$ Valen estimates the useful life of the franchise to be $10$ years and takes a full year's amortization in the year of purchase.

Valen incurred R&D costs in Year $2$ as follows:

Materials and equipment $$103,000$

Personnel $179,000$

Indirect costs $65,000$

$$347,000$

Valen estimates that these costs will be recouped by December $31,$ Year $3.$

On January $1,$ Year $2,$ Valen estimates, based on new events, that the remaining life of the patent purchased on January $1,$ Year $1,$ is only $10$ years from January $1,$ Year $2.$