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p$11-15$ Accounting for internally developed patents versus purchased patents and making intercompany comparisons

Consider the following tow scenarios:

Scenario $1$: over the $20$x$1-20$x$5$ period, Mocro Systems, Inc, spends $$10$ million a year to develop patents on a new computer hardware manufacturing technology. While some of its projects failed, the firm did develop several new patents eacch year during the period.

Scenario II: over the $20$x$1-20$x$5$ period, Macro Systems, Inc, a competitor of Mocro Systems, Inc, paid $$10$ million each year to acquie patent rights from other firms. The firm assigned a five$-$year useful lif to all of te patents.

Micro Systems Inc. $-$ Internally developed

$($$ in thousands$)20$X$120$X$220$X$320$X$420$X$5$

Sales $$200,000$ $$242,000$ $$290,000$ $$350,000$ $$400,000$

Operating expenses $140,000170,000205,000245,000265,000$

R&D

Patent amortization expense

Income before tax

Income taxes

Net income

Profit Margin

Macro Systems Inc. $-$ Purchased patents

$($$ in thousands$)20$X$120$X$220$X$320$X$420$X$5$

Sales $$200,000$ $$242,000$ $$290,000$ $$350,000$ $$400,000$

Operating expenses $140,000170,000205,000245,000265,000$

R&D

Patent amortization expense $-----$

Income before tax

Income taxes

Net income

Profit margin

Amortization by year of purchase

$20$X$1-----$

$20$X$2----$

$20$X$3---$

$20$X$4--$

$20$X$5-$

Total amortization for year $-----$

$($$ in thousands$)20$X$120$X$220$X$320$X$420$X$5$

Micro Systems Balance sheet

Patent

Accumulated amortization

Net

Required

$1.$ How would the two firms account for their patent$-$related expenditure?

$2.$ Calculate each firm's new income and new income as a percent of sales $($that is$,$ profit margin$)$ for $20$x$1-20$x$5$ period. Contrast the reported profitability of the two firms

$3.$ Assume that the firms continue to spend $$10$ million per year in the way just described. How would the comparability of thier income statements and balance sheets be affected?

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