P12-3 (Accounting for Franchise, Patents, and Trade Name) Information concerning Haerhpin Corporation’s
intangible assets is as follows.
1. On January 1, 2007, Haerhpin signed an agreement to operate as a franchisee of Hsian Copy Service,
Inc. for an initial franchise fee of $75,000. Of this amount, $15,000 was paid when the agreement
was signed, and the balance is payable in 4 annual payments of $15,000 each, beginning January 1,
2008. The agreement provides that the down payment is not refundable and no future services are
required of the franchisor. The present value at January 1, 2007, of the 4 annual payments discounted
at 14% (the implicit rate for a loan of this type) is $43,700. The agreement also provides
that 5% of the revenue from the franchise must be paid to the franchisor annually. Haerhpin’s revenue
from the franchise for 2007 was $950,000. Haerhpin estimates the useful life of the franchise
to be 10 years. (Hint: You may want to refer to Appendix 18A to determine the proper accounting
treatment for the franchise fee and payments.)
2. Haerhpin incurred $65,000 of experimental and development costs in its laboratory to develop a
patent that was granted on January 2, 2007. Legal fees and other costs associated with registration
of the patent totaled $13,600. Haerhpin estimates that the useful life of the patent will be 8 years.
3. A trademark was purchased from Shanghai Company for $32,000 on July 1, 2004. Expenditures for
successful litigation in defense of the trademark totaling $8,160 were paid on July 1, 2007. Haerhpin
estimates that the useful life of the trademark will be 20 years from the date of acquisition.
(a) Prepare a schedule showing the intangible assets section of Haerhpin’s balance sheet
31, 2007. Show supporting computations in good form.
(b) Prepare a schedule showing all expenses resulting from the transactions that would appear on
Haerhpin’s income statement for the year ended December 31, 2007. Show supporting computations
in good form.