112. Keewatin Corp recently purchased a patent and new machinery to produce a new product called ABLE. They paid $40,000 for the patent and $250,000 for the machine. The patent has a legal life of 20 years, but Keewatin expects to stop producing ABLE in 5 years. The machine has an expected useful life of 10 years, and Keewatin thinks that they may be able to use it to produce other items when they finish producing ABLE. The estimated salvage value of the machine is $5,000. The estimated production of ABLE over the next 5 years is, respectively, 10,000 units, 18,000 units, 12,000 units, 7,000 units and 3,000 units.
Required:
A) Calculate the amortization of the patent on a straight-line basis. Support any assumptions you make.
B) Calculate the amortization of the machine on i) a units-of-production basis and ii) a straight-line basis over its useful life.
C) Recommend amortization policies for the patent and the machine for Keewatin. Support your recommendations.
D) Assume that Keewatin was amortizing the machine over its useful life of 10 years, but decided to sell it after 5 full years for $75,000. Calculate the gain or loss on the sale.
113. A friend has approached you with a question about a business he is thinking of buying. He has the opportunity to buy a Summer Student Painting (SSP) franchise from a student who started the franchise and ran the business for the last three years. It is now a nationally known company. The deal gives your friend exclusive rights to the SSP name in the city. SSP is a respected brand, and the previous owner has been able to easily pay for his university education plus a car and nice holidays while he ran the business. Your friend is confused why the asking price for the business is $75,000 while the assets on the balance sheet, which consist of some equipment and office supplies, only totals $10,000. The previous owner said a list of customer names was included in one of the office boxes. Satisfied customers will tend to use the same firm if they have other painting requirements in the future.
Required:
A) Explain to your friend the reasons why the business might cost more than the sum of the assets.
B) Your friend also wants to know if he will have the same trouble with his balance sheet when he tries to sell the franchise in two years.