Concept explainers
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 $50,000.
2.
Prepare journal entries to record the amortization expense of intangible assets of Company B for 2019 and identify the amortization method which is more appropriate.
2.
Explanation of Solution
Prepare journal entries to record the amortization expense of intangible assets of Company B for 2019 as follows:
a. Amortization expense of patent.
Patent should be amortized over its legal life, because the legal life of the patent is 20 years as per GAAP.
Date | Account Title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
December 31, 2019 | 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, 2019 | 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, 2019 | 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, 2019 | 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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Chapter 12 Solutions
Intermediate Accounting: Reporting And Analysis
- In examining Samson Manufacturing Companys books, you find on the December 31, 2019, balance sheet the item, Costs of patents, 308,440. Referring to the ledger accounts, you note the following items regarding one patent acquired in 2016; There are no credits in the account, and the company has not recorded any amortization for any of the patents. There are three other parents issued in 2013, 2015, and 2016; all were developed by the staff of Samson. The patented articles are presently very marketable, but are estimated to be in demand only for the next few years. Required: Discuss the accounting issues related to the items included in the Patent account.arrow_forwardHamilton Companys balance sheet on January 1, 2019, was as follows: Korbel Company is considering purchasing Hamilton (a privately held company) and discovers the following about Hamilton: a. No allowance for doubtful accounts has been established. A 10,000 allowance is considered appropriate. b. Marketable securities are valued at cost. The current market value is 60,000. c. The LIFO inventory method is used. The FIFO inventory of 140,000 would be used if the company is acquired. d. Land, included in property, plant, and equipment, which is recorded at its cost of 50,000, is worth 120,000. The remaining property, plant, and equipment is worth 10% more than its depreciated cost. e. The company has an unrecorded trademark that is worth 70,000. f. The companys bonds are currently trading for 130,000. g. The pension liability is understated by 40,000. Required: 1. Compute the amount of goodwill if Korbel agrees to pay 500,000 cash for Hamilton. 2. Next Level What are the reasons that the book value of Hamiltons net identifiable assets differ from their market value? 3. Prepare the journal entry to record the acquisition on the books of Korbel assuming Hamilton is liquidated. 4. If Korbel agrees to pay only 400,000 cash, how much goodwill exists? 5. If Korbel pays only 400,000 cash, prepare the journal entry to record the acquisition on its books, assuming Hamilton is liquidated.arrow_forward
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