Kermit Inc., a small firm, has recently hired you as their accountant. They are unsure about the accounting treatment and financial reporting of various issues within their firm and require your assistance.

The firm purchased a patent from P&G on January 1, 2018 for $65,000. The patent has a remaining legal life of eight years but Kermit believes it will only be useful for five years at the most. On January 1, 2019, a competitor filed a lawsuit against Kermit's patent. Kermit incurred $2,000 in court to successfully defend the patent.

Kermit incurred $120,000 to purchase the franchise of a fast food restaurant on September 1, 2019. The franchise agreement will last 15 years but Kermit believes it may want to extend it to 20 years in the future.

Instructions

Compute the carrying value of the patent at December 31, 2020 for Kermit.

Compute the carrying value of the franchise at December 31, 2020.

Kermit is unsure how the carrying value would have been different if they the firm had lost the lawsuit. Compute the carrying value of the patent assuming the firm was unsuccessful in defending the lawsuit.

Computations:

Carrying value of patent at December 31, 2020:

Carrying value of franchise at December 31, 2020:

Requirement 3: