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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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On January 4, 2019, Franc Company purchased for $27,000 a patent that had been filed 8 years earlier. The patent covers a manufacturing process that the company plans to use for 15 years. On January 3, 2020, the company paid its lawyers $10,000 for successfully defending the patent in a lawsuit.

Required:

Prepare all the journal entries associated with the patent in 2019 and 2020. (Round all calculations to the nearest dollar)

To determine

Prepare necessary journal entries of Company F for 2019 and 2020.

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.

Prepare necessary journal entries of Company F for 2019 and 2020 as follows:

For 2019:

DateAccount Title and Explanation

Debit

($)

Credit

($)

January 4, 2019Patent27,000 
     Cash 27,000
 (To record the patent purchased for cash)  

Table (1)

  • Patent is an asset account, and it increases the value of asset. Hence, debit the patent account with $27,000.
  • Cash is an asset account, and it decreases the value of asset. Hence, credit the cash account with $27,000.
DateAccount Title and Explanation

Debit

($)

Credit

($)

December 31, 2019Amortization expense (1)2,250 
     Patent 2,250
 (To record the amortization expense incurred)  

Table (2)

  • Amortization expense is component of shareholders’ equity, and it decreases the value of shareholders equity. Hence, debit the amortization expense with $2,250.
  • Patent is an asset account, and it decreases the value of asset. Hence, credit the patent account with $2,250.

Working note (1):

Calculate the amortization expense for 2019.

Step 1: Calculate the remaining useful life of patent.

Remaining useful life = (Useful life of the patent Number of year patent used earlier)=20 years8 years=12 years

Note: The federal government gives 20 years useful life for patent from the date of filling.

Step 2: Calculate the amortization expense for 2019.

Amortization expnes for 2019 = Purchased price of patentRemaing useful life=$27,00012 years (step 1)=$2,250

For 2020:

DateAccount Title and Explanation

Debit

($)

Credit

($)

January 3, 2020Patent10,000 
     Cash 10,000
 (To record the capital expenditure incurred for patent)  

Table (3)

  • Patent is an asset account, and it increases the value of asset

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