Accounting 2 Problems
BE12-7 Waters Corporation purchased Johnson Company 3 years ago at that time recorded goodwill of $400,000. The Johnson Division’s net assets, including the goodwill, have a carry amount of $800,000. The fair value of the division is estimated to be $1,000,000. Prepare Water’s journal entry , if necessary to record impairment of the goodwill.
BE12-10 Treasure Land Corporation incurred the following costs in 2014.
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Cost of laboratory research aimed at discovery of new knowledge $120,000
Cost of testing in search for product alternatives 100,000
Cost of engineering activity required o advance the design of a 210,000
product to the manufacturing stage
BE12-13 Sinise Industries acquired two copyrights during 2014. One copyright related to a textbook that was developed internally at a cost of $9,900. This textbook is estimated to have a useful life of 3 years from September 1, 2014, the date it was published. The second copyright (a history research textbook) was purchased from University on December 1, 2014, for $24,000. This textbook has an indefinite useful life. How should these two copyrights be reported on Sinise’s balance sheet as of December 31, 2014.
E12-4 (Intangible Amortization) Presented below is selected information for Alatorre Company.
1.Altorre purchased a patent from Vania Co. for $1,000,000 on January 1, 2012. The patent is being amortized over its remaining legal life of 10 years, expiring on January 1, 2022. During 2014, Alatorre determined that the economic benefits of the patent would not last longer than 6 years from the date of acquisition. What amount should be reported in the balance sheet for the patent, net accumulated amortization, at December 31, 2014?
2.Alatorre bought a franchise from Alexander Company on January 1, 2013, for $400,000. The carrying amount of the franchise on Alexander’s book on January 1, 2013, was $500,000. The franchise agreement had an estimated useful life of 30 years. Because Alatorre must enter a competitive bidding at the end of 2015, it is unlikely that the franchise will be retained beyond 2022. What amount should be amortized for the year ended December 31, 2014?
3.On January 1, 2014, Alatorre incurred organization costs of $275,000. What amount of organization expense should be reported in 2014?
4.Alatorre purchased the license for distribution of a popular consumer product on January 1, 2014, for $150,000. It is expected that this product will generate cash flows for an indefinite period of time. The license has an initial term of 5 years but by paying a nominal fee, Alatorre can renew the license indefinitely for successive 5-year term. What amount should be amortized for the year ended December 31, 2014?
Answer the questions about each of the factual situations.
E12-11(Accounting for Patents) Tones Industries has the following patents on its December 31, 2013,
Patent Item Initial Cost Date Acquired Useful life at Date Acquired
Patent A 30,600 3/1/10 17 years
Patent B 15,000 7/1/11 10 years
Patent C 14,000 9/1/12 4 years
The following events occurred during the year ended December 31, 2014.
1.Research and development costs of $2454,700 were incurred during the year.
2.Patent D was purchased on July 1 for $36,480. This patent has a useful life of 9 1/2 years.
3.As a result of reduced demands for certain products protected by Patent B, possible impairment of Patent B’s value may have occurred at December 31. 2014. The controller for Tones estimates the expected future cash flows from Patent B will be as follows.
Year Expected Future Cash Flows
The proper discount rate to be used for these flows is 8% (Assume that the cash flows occur at the end of the year.)
(a)Compute the total carrying amount of Tones’ patents on its December 31, 2013 balance sheet.
(b)Compute the total carrying amount of Tones’ patents on its December 31, 2014, balance sheet.
E12-14(Copyright Impairment) Presented below is information related to copyrights owned by Walter de la Mare Company at December 31, 2014.
Carrying amount 4,300,000
Expected future net cash flows 4,000,000
Fair value 3,200,000
Assume that Walter de la Mare Company will continue to use this copyright in the future. As of December 31,2014, the copyright is estimated to have a remaining useful life of 10 years.
(a)Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2014. The company does not use accumulated amortizationaccouints.
(b)Prepare the journal entry to record amortization expense for 2015 related to the copyrights.
(c)The fair value of the copyright at December 31, 2015, is $3,400,000. Prepare the journal entry (if any) necessary to record the increase in fair value.
P12-4 (Accounting for R & D Costs) During 2012, Robin Wright Tool Company purchased a building site for its proposed research and development laboratory as a cost of $60,000. Construction of the building was started in 2012. The building was completed on December 31, 2013, at a cost of $320,000 and was placed in service on January 2, 2014. The estimated useful life of the building for depreciation purposes was 20 years. The straight-line method was to be employed and there was no estimated residual value.
Management estimates that 50% of the projects of the research and development group will result in long-term benefits(i.e.,at least 10 years) to the corporation. The remaining projects either benefit the current period or are abandoned before completion. A summary of the number of projects and the direct costs incurred in conjunction with the research and development activities for 2014 appears below.
Number of Projects Salaries and Other Employee Expenses
Completed projects 15 90,000 50,000
with long-term benefits
Abandoned projects or 10 65,000 15,000
projects that benefit the
Projects in process 5 40,000 12,000
Total 30 195,000 77,000
Upon recommendation of the research and development group, Robin Wright Tool Company acquired a patent for manufacturing rights at a cost of $88,000. The patent was acquired on April 1, 2013, and has an economic life of 10 years.
It generally accepted accounting principles were followed, how would the items above relate to research and development activities be reported on the following statements?
(a)The company’s income statement for 2014.
(b)The company’s balance sheet as of December 31, 2014.