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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Amortization and depletion entries

Data related to the acquisition of timber rights and intangible assets during the current year ended December 31 are as follows:

  1. a. On December 31, the company determined that $3,400,000 of goodwill was impaired.
  2. b. Governmental and legal costs of $4,800,000 were incurred on September 30 in obtaining a patent with an estimated economic life of eight years. Amortization is to be for one-fourth of a year.
  3. c. Timber rights on a tract of land were purchased for $2,975,000 on February 4. The stand of timber is estimated at 12,500,000 board feet. During the current year, 4,150,000 board feet of timber were cut and sold.

Instructions

  1. 1. Determine the amount of the amortization, depletion, or impairment for the current year for each of the foregoing items.
  2. 2. Journalize the adjusting entries to record the amortization, depletion, or impairment for each item.

1.

To determine

Amortization: It is the process of allocating the value of an intangible asset over its definite useful life such as patent, copyright, and trademark.

Impairment of Goodwill: It is a situation that arises when the carrying value of the goodwill listed on the acquired company’s balance sheet, exceeds its fair market value.

Depletion: It refers to the process of proportionately distributing the cost of the extracting natural resources such as coal, mines, and petroleum from the earth to the number of units extracted. The following is the formula to calculate the depletion expense:

Depletion Cost per Unit = Cost of the asset  Residual valueEstimated Number of Units

Depletion Expense=(Depletion Cost per Unit × Number of units Extracted and Sold)

To determine: the amount of the amortization, depletion expense or impairment for the current year.

Explanation

Determine the amount of the impairment for the current year for goodwill.

A goodwill asset becomes impaired when the fair market value of the asset reduces than its purchase price.

The company has determined the goodwill impairment value which amounts to $3,400,000. Thus, the loss on impairment of goodwill is $3,400,000.

Determine the amount of the amortization expense of patents for the current year.

Cost incurred for patent on September 30 = $4,800,000

Estimated economic life = 8 years

Amortization expense = Cost of the asset  Residual valueUseful life×14=$4,800,000 $08 Years×14=$600,000×14=$150,000

The amount of the amortization expense for the current year for patent cost is $150,000.

Determine the amount of the depletion expense for the current year.

Depletion rate =$0.238 per board foot (1)

Number of board feet of timber cut and sold =4,150,000 board feet

Depletion Expense = (Depletion rate×Number of timberscut and sold)=$0

2.

To determine

To journalize: the adjusting entry on December 31 to record the amortization, depletion, or impairment.

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