Taylor Lewis Company has provided information on intangible assets as follows.
A patent was purchased from Craig Company for $4,000,000 on June 1, 2010. Lewis estimated the remaining useful life of the patent to be eight years. The patent was carried in Craig's accounting records at a net book value of $3,500,000 when Craig sold it to Lewis.
During 2011, a franchise was purchased from Faragher Company for $360,000. In addition, 8% of revenue from the franchise must be paid to Faragher. Revenue from the franchise for 2011 was $1,950,000. Lewis estimates the useful life of the franchise to be 12 years and takes a full year's amortization in the year of purchase.
Lewis incurred research and development costs in 2010 as follows.
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Materials and equipment
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$286,500
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Personnel
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$153,700
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Indirect costs
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$ 95,355
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$535,555
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Lewis estimates that these costs will be recouped by December 31, 2014. The materials and equipment purchased have no alternative uses.
On January 1, 2011, because of recent events in the field, Lewis estimates that the remaining life of the patent purchased on June 1, 2010, is only five years from January 1, 2011.
a. Prepare a schedule showing the intangible section of Lewis's balance sheet at December 31, 2011. Show supporting computations in good form.
b. Prepare a schedule showing the income statement effect for the year ended December 31, 2011, as a result of the facts above. Show supporting computations in good form.