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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Bryant Corporation was incorporated on December 1, 2018, and began operations one week later. Before closing the books for the fiscal year ended November 30, 2019, Bryant’s controller prepared the following financial statements:

Chapter 12, Problem 11P, Bryant Corporation was incorporated on December 1, 2018, and began operations one week later. Before , example  1

Chapter 12, Problem 11P, Bryant Corporation was incorporated on December 1, 2018, and began operations one week later. Before , example  2

Bryant is in the process of negotiating a loan for expansion purposes, and the bank has requested audited financial statements. During the course of the audit, the following additional information was obtained:

  1. a. Included in selling and administrative expenses were $5,000 of software development expense related to costs incurred on software being developed for sale to others. The technological feasibility of the software has been established.
  2. b. Based on an aging of the accounts receivable as of November 30, 2019, it was estimated that $36,000 of the receivables will be uncollectible.
  3. c. Inventories at November 30, 2019, did not include work-in process inventory costing $12,000 sent to an outside processor on November 26, 2019.
  4. d. A $3,000 insurance premium paid on November 30, 2019, on a policy expiring one year later was charged to insurance expense.
  5. e. On June 1, 2019, a production machine purchased for $24,000 was charged to repairs and maintenance expense. For financial and tax purposes, Bryant depreciates machines of this type using the straight-line method over a 5-year life with no salvage value.
  6. f. R&D costs of $150,000 were incurred in the development of a patent that Bryant expects to be granted during the fiscal year ending November 30, 2020. Bryant initiated a 5-ycar amortization of the $150,000 total cost during the fiscal year ended November 30, 2019.
  7. g. During December 2019, a competitor company filed suit against Bryant for patent infringement, claiming $200,000 in damages. Bryant’s legal counsel believes that an unfavorable outcome is probable. This lawsuit is deemed to be a subsequent event that should be recognized in the current fiscal year and a reasonable accrual based on an estimate of the court’s award to the plaintiff is $50,000.
  8. h. The 21% effective tax rate was determined to be appropriate for calculating the provision for income taxes for the fiscal year ended November 30, 2019. Ignore computation of the deferred portion of income taxes.

    Required:

  9. 1. Prepare the necessary correcting entries.
  10. 2. Prepare a corrected balance sheet for Bryant as of November 30, 2019, and a corrected income statement for the year ended November 30, 2019.

1.

To determine

Prepare the necessary correcting entries of Company B.

Explanation

Research and development costs: It refers to the expenditures spent on research, development, improvement or introduction of new products, processes, a new patent or even a copyright, that a company expects to get benefits. It is reported under the intangible asset in the balance sheet.

Intangible assets: These are the long-term assets which are not physical in nature, but possess value. The intangible assets would be amortized over their definite useful life or limited useful life, and those with indefinite or unlimited lives are not amortized.

Prepare the necessary correcting entries of Company B as follows:

DateAccount Title and ExplanationPost Ref

Debit

($)

Credit ($)
a.Software development costs 5,000 
  Software development expense  5,000
  (To record the capitalization of computer software costs)   
      
 b.Allowance for doubtful accounts (1) 23,000 
  Bad debt expense  23,000
  (To record the allowance for doubtful account)   
      
 c.Inventories 12,000 
  Cost of goods sold  12,000
  (To record the inventory held by outside processor)   
      
 d.Prepaid insurance 3,000 
  Insurance expense  3,000
  (To record the payment made for insurance in advance)   
      
 e.Property, plant, and equipment 24,000 
  Depreciation expense (2) 2,400 
  Repair & maintenance expense  24,000
  Accumulated depreciation  2,400
  (To record the repairs and maintenance of machine purchased and its depreciation)   
      
 f.Research and development expense (3) 120,000 
  Research and development costs  120,000
  (To record the write off research and development costs in accordance with GAAP)   
      
 g.Loss from litigation 50,000 
  Estimated liability from lawsuit  50,000
  (To record the loss from litigation)   
      
 h...

2.

To determine

Prepare a corrected balance sheet and a corrected income statement of Company B for the year ended November 30, 2019.

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