On June 2, 2021, Tabitha Co. purchased a franchise for $586,000 by signing a five-year contract. At the end of the five years, the franchise right reverts back to the seller. On September 1, 2023, Tabitha decides to sell the franchise right for $340,000. The company amortizes intangible assets using the straight-line method and records partial-year amortization based on the number of months in service. Assuming the company has a December 31 year-end, what is the gain or loss recorded on the sale of the patent

Tabitha Co.

The gain recorded on the sale of the patent is:

= $7,933

Explanation:

a) Data and Calculations:

June 2, 2021, Purchase of Franchise for $586,000

Period of franchise = 5 years

September 1, 2023, Sale of Franchise for $340,000

Annual amortization expense = $117,200 ($586,000/5)

Amortization Schedule:

June 2, 2021 to December 31, 2021 = $58,600 ($117,200/2)

Jan. 1, 2022 to December 31, 2021 =  $117,200

Jan. 1, 2023 to September 1, 2023 =    $78,133 ($117,200 * 8/12)

Total amortization during the period = $253,933

Initial cost = $586,000

Accumulated amortization = $253,933

Reduced book value = $332,067

Sales proceed = $340,000

Gain from sales = $7,933 ($340,000 - $332,067)

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