Acct 551 - Homework 1

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E12-1 (Classification Issues—Intangibles) Presented below is a list of items that could be included in the intangible assets section of the balance sheet.
1. Investment in a subsidiary company.
2. Timberland.
3. Cost of engineering activity required to advance the design of a product to the manufacturing stage.
4. Lease prepayment (6 months’ rent paid in advance).
5. Cost of equipment obtained.
6. Cost of searching for applications of new research findings.
7. Costs incurred in the formation of a corporation.
8. Operating losses incurred in the start-up of a business.
9. Training costs incurred in start-up of new operation.
10. Purchase cost of a franchise.
11. Goodwill generated internally.
12. Cost of testing in search for
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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, Palmiero can renew the license indefinitely for successive 5-year terms. What amount should be amortized for the year ended December 31, 2012?

1 . Alatorre should report the patent at $600,000 (net of $400,000 accumulated amortization) on the balance sheet. The computation of accumulated amortization is as follows.

Amortization for 2005 and 2006 ($1,000,000/10) X 2 $200,000
2007 amortization: ($1,000,000 – $200,000) ÷ (6 – 2) 200,000
Accumulated amortization, 12/31/07 $400,000

2. Alatorre should amortize the franchise over its estimated useful life.
Because it is uncertain that Alatorre will be able to retain the franchise at the end of 2015, it should be amortized over 10 years. The amount of amortization on the franchise for the year ended December 31, 2007, is
$40,000: ($400,000/10).

3. These costs should be expensed as incurred. Therefore $275,000 of organization expense is reported in income for 2007.

4. Because the license can be easily renewed (at nominal cost), it has an indefinite life. Thus, no amortization will be recorded. The license will be tested for impairment in future periods.

E12-5 (Correct Intangible Asset Account) As the recently appointed auditor for Hillary Corporation, you have been asked to examine

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