1.
Prepare necessary
1.
Explanation of Solution
Patent: Patent is a right that is exclusively granted by the Government to an individual or firm to process or design, to make, use or sell its invention for a limited period. It protects the right of the inventor from doing so by any other individual till the granted period expires.
Trademark: It is an exclusive right of an entity or business to display its identity of the products or goods through a registered word, symbol, or emblem.
Copyright: Copyright is the legal right granted to the writers, musicians, artists, and owners to recreate, or develop their original work. In simple words, it is right to copy by the authors.
Prepare necessary journal entries to record the given transaction of Company B as follows:
a. Patent purchased for $70,000.
Date | Accounting Title and Explanation | Post Ref. | Debit ($) | Credit ($) |
Patent | 70,000 | |||
Cash | 70,000 | |||
(To record the purchase of patent) |
Table (1)
- A Patent is an asset account and it is increased. Therefore, debit patents account with $70,000.
- Cash is an asset account and it is decreased. Therefore, credit cash account with $70,000.
b. Novel rights purchased by a best-selling novelist.
Date | Accounting Title and Explanation | Post Ref. | Debit ($) | Credit ($) |
Copyrights | 600,000 | |||
Common stock, $10 par | 100,000 | |||
Additional paid in capital | 500,000 | |||
(To record the purchase of copyrights) |
Table (2)
- Copyright is an asset account and it is increased. Therefore, debit copyright account with $600,000.
- Common stock is a component of
stockholder’s equity and it is increased. Therefore, credit the common stock with $100,000. - Additional paid in capital is a component of stockholder’s equity and it is increased. Therefore, credit the common stock with $500,000.
c. Acquisition of franchise.
Date | Accounting Title and Explanation | Post Ref. | Debit ($) | Credit ($) |
Franchise | 10,000 | |||
Cash | 10,000 | |||
(To record the acquisition of franchise) |
Table (3)
- Franchise is an asset account and it is increased. Therefore, debit franchise account with $10,000.
- Cash is an asset account and it is decreased. Therefore, credit cash account with $10,000.
d. Legal cost paid for patent.
Date | Accounting Title and Explanation | Post Ref. | Debit ($) | Credit ($) |
Patent | 28,000 | |||
Cash | 28,000 | |||
(To record the legal fees paid for patent) |
Table (4)
- A Patent is an asset account and it is increased. Therefore, debit patents account with $28,000.
- Cash is an asset account and it is decreased. Therefore, credit cash account with $28,000.
e. Advertising expense paid in advance.
Date | Accounting Title and Explanation | Post Ref. | Debit ($) | Credit ($) |
Prepaid advertising | 50,000 | |||
Cash | 50,000 | |||
(To record the advertising expense paid in advance) |
Table (5)
- Prepaid advertising is an asset account and it is increased. Therefore, debit prepaid advertising account with $50,000.
- Cash is an asset account and it is decreased. Therefore, credit cash account with $50,000.
2.
Prepare journal entries to record the amortization expense of intangible assets of Company B for 2016 and identify the amortization method which is more appropriate.
2.
Explanation of Solution
Prepare journal entries to record the amortization expense of intangible assets of Company B for 2016 as follows:
a. Amortization expense of patent.
Patent should be amortized over its legal life, because the legal life of the patent is 20 years as per GAAP.
Date | Account Title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
December 31, 2016 | Amortization expense (1) | 7,000 | ||
Patent | 7,000 | |||
(To record the amortization expense incurred) |
Table (6)
- Amortization expense is component of shareholders’ equity, and it decreases the value of shareholders equity. Hence, debit the amortization expense with $7,000.
- Patent is an asset account, and it decreases the value of asset. Hence, credit the patent account with $7,000.
Working note (1):
Calculate the amortization expense of patent.
b. Amortization expense of copyrights.
Copyright should be amortized based on the
Date | Account Title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
December 31, 2016 | Amortization expense (2) | 200,000 | ||
Copyrights | 200,000 | |||
(To record the amortization expense incurred) |
Table (7)
- Amortization expense is component of shareholders’ equity, and it decreases the value of shareholders equity. Hence, debit the amortization expense with $200,000.
- Copyright is an asset account, and it decreases the value of asset. Hence, credit the copyright account with $200,000.
Working note (2):
Calculate the amortization expense of copyright.
c. Amortization expense of franchise.
Franchise should be amortized over its legal life, because the franchise is 5 years (given).
Date | Account Title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
December 31, 2016 | Amortization expense (3) | 2,000 | ||
Franchise | 2,000 | |||
(To record the amortization expense incurred) |
Table (8)
- Amortization expense is component of shareholders’ equity, and it decreases the value of shareholders equity. Hence, debit the amortization expense with $2,000.
- Franchise is an asset account, and it decreases the value of asset. Hence, credit the franchise account with $2,000.
Working note (3):
Calculate the amortization expense of franchise.
d. Amortization expense of patent.
The amortization of legal costs of the patent is included in transaction a.
e. Advertising expense incurred during the year.
Date | Account Title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
December 31, 2016 | Advertising expense (4) | 25,000 | ||
Prepaid advertising | 25,000 | |||
(To record the advertising expense incurred at the end of the year) |
Table (9)
- Advertising expense is component of shareholders’ equity, and it decreases the value of shareholders equity. Hence, debit the advertising expense with $25,000.
- Prepaid advertising is an asset account, and it decreases the value of asset. Hence, credit the prepaid advertising account with $25,000.
Working note (4):
Calculate the advertising expense.
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