Palmer, Inc., is a large, publicly-held corporation. During the current fiscal year ended September 30, 2012, Palmer made certain expenditures. Determine the proper accounting treatment for these expenditures so that Palmer’s financial statements will be prepared according to generally accepted accounting principles.
A pilot plant was constructed during the current fiscal year at a cost of $5,500,000 to test a new production process. The plant will be operated for approximately 5 years. At that time, the company will make a decision regarding the economic value of the process. The pilot plant is too small for commercial production, so it will be dismantled when the test is over.
Palmer purchased Banner Company on June 1, 2012, for $6,000,000 in cash when the fair market value of the identifiable assets of Banner was $5,200,000.
On 10/1/10, Palmer purchased a patent for $500,000. The patent has a remaining legal life of 12 years, but Palmer only expects to benefit from holding the patent for 5 years. The patent covers a very popular processed snack food, which will undoubtedly lose popularity by then. On 11/1/11, Palmer incurred legal costs of $50,000 in defending the validity of the patent. Palmer spent another $60,000 on 3/1/12 prosecuting an infringement suit. Palmer won both suits. On 4/1/12, Palmer spent $60,000 in improvements (unpatented) on the process. The improvements overcome a production difficulty; they will not extend the useful life of the patent.
Palmer purchased a ten-year licensing agreement on 4/1/12 for $2,000,000. Under this license, Palmer can sell a certain product at prices specified by the licensor and must pay a royalty of 5% of sales to the licensor. Palmer expects to benefit considerably from the license over the ten years. Sales of the product in fiscal 2012 totaled $1,500,000.
Determine the amount, if any, of each expenditure that should be capitalized. Show how it would appear on Palmer’s balance sheet at 9/30/12.
Prepare a schedule showing the income statement effect for the year ended 9/30/12 as a result of the expenditures listed above.