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Intermediate Accounting: Reporting...

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

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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Jolis Company has provided information on the following items:

1. A patent was purchased from Totley (Company for $500,000 on January 1, 2018. At that time, Jolis estimated the remaining useful life to be 10 years. The patent was carried on Totley’s books at $20,000 when it sold the patent.

2. On March 2, 2019, a franchise was purchased from Unal Company for $240,000. In addition, 8% of the revenue from the franchise must be paid to Unal. Revenue earned during 2019 was $620,000. Jolis believes that the life of the franchise is indefinite and that the franchise is not impaired at the end of 2019.

3. R&D costs were incurred as follows: (a) materials and equipment, $50,000; (b) personnel, $80,000; and (c) indirect costs, $40,000. The costs were incurred to develop a product that will go on sale in 2020 and will have an expected life of 5 years.

4. A trade name had been purchased for a sugar substitute at the beginning of 2015 for $80,000. In January 2019, it was suspected that the product caused cancer. Its fair value was estimated to be zero and the trade name was abandoned.

5. The company purchased the net assets of Lansing Company on September 1, 2019, for $950,000, and Lansing was liquidated. Lansing had the following book (fair) values: cash, $50,000 ($50,000); inventory, $150,000 ($160,000); property, plant, and equipment, $750,000 ($900,000); accounts payable, $75,000 ($75,000); and notes payable, $175,000 ($175,000). Any goodwill is not impaired at the end of 2019.

Required:

Prepare journal entries for Jolis for 2019. The company uses the straight-line method of amortization computed to the nearest month over the maximum allowable life. Assume that the company pays all costs in cash, unless otherwise indicated.

To determine

Prepare necessary journal entries of Company J for 2019.

Explanation

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.

Goodwill: Goodwill is the good reputation developed by a company over years. This is recorded as an intangible asset, and is quantified when other company acquires. Goodwill should be recorded only when one company is acquired by another company. Goodwill value would be impaired, if the book value of goodwill is less than fair market value.

Prepare necessary journal entries of Company J for 2019 as follows:

Date Account Title & Explanation Debit ($)

 Credit

($)

20191.Amortization expense – Patent (1)50,000 
  Patent  50,000
  (To record the amortization expense for patent incurred)
 2.Franchise 240,000
  Cash240,000
  (To record the purchase of franchise)
  Cash620,000
  Sales revenue620,000
  (To record the sales revenue earned for cash)
  Franchise expense (2)49,600
  Cash49,600
  (To record the franchise expense incurred)
 3.Research and development expense (3)170,000
  Cash170,000
  (To record the research development cost incurred)
 4.Loss on impairment80,000
  Trade name80,000
  (To record the impairment loss of trade name)
 5.Accounts receivable50,000
  Inventory160,000
  Property, plant and equipment900,000
  Goodwill (4)90,000
  Accounts payable75,000
  Notes payable175,000
  Cash950,000
  (To record the acquisition of Company L)

Table (1)

Working note (1):

Calculate the amortization expense of patent...

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