The CMS Co

question 123

Essay

The CMS Co. began operations in January 2016. Listed below are selected transactions for 2016 and 2017:
? During 2016, $125,000 in R&D expenditures were made to develop a new product that was patented on July 1, 2016. CMS believes the patent will provide benefits for ten years. Legal fees incurred were $24,000.
? On September 1, 2016, CMS paid EZ Company $180,000 for its patent on a successful product. The patent has six remaining years in its legal life.
? On October 1, 2016,CMS applied for and received a trade name from the government. The
legal costs associated with filing for the trade name were $10,000. In addition, during November 2016, the company incurred $50,000 in advertising its name. Benefits are expected indefinitely.
? In early January 2017, CMS paid $20,000 in legal fees to defend the patent acquired from
EZ. CMS's attorneys were successful in the lawsuit.
? During 2017, R&D expenditures of $90,000 were incurred in the development of a product.
A patent was received on December 1, 2017. Legal fees paid in connection with the patent were $15,000. The economic life of the product is expected to be five years.
Required:
a. Prepare a partial balance sheet for CMS Company as of December 31, 2017, showing the intangible assets. In support of your answer, prepare a separate schedule for each intangible asset. The company amortizes its intangible assets using the straight-line method and recognizes amortization to the nearest month.
b. Prepare a schedule to calculate CMS's expenses related to the above transactions for both
2016 and 2017.

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Definitions:

Expectations Theory

A theory suggesting that the interest rates on long-term bonds will reflect expected future short-term rates.

Forward Rates

The interest rates implied by current zero-coupon bond prices for periods in the future.

Future Short Interest Rate

An estimation or prediction of the interest rates at a future point in time, often used in the valuation of interest rate derivatives.

Stripped Treasuries

Stripped Treasuries are US Treasury securities whose principal and interest payments have been separated to create two new securities, allowing investors to hold and trade the components separately.