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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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During the year-end audit of Cressman Corporation’s financial statements for 2019, you discover the following items:

  1. 1. Cressman capitalized $57,000 to the Patent account at the beginning of 2018 for the cost of a patent. This amount included $50,000 of R&D costs. The patent was amortized over a 20-year life in 2018 and 2019.
  2. 2. At the beginning of 2018, Cressman paid its lawyers $8,000 to successfully defend a patent infringement suit regarding the patent in Item 1. Cressman debited this cost to Legal Fees Expense.
  3. 3. At the beginning of 2019, Cressman purchased a patent for $30,000 from Baylor Company to prevent potential competition. It recorded the cost in the Patent account and amortized this cost over the remaining legal life of the patent obtained in Item 1 (19 years). However, Cressman agreed to a suggestion by the auditors that the life of the original patent obtained in Item 1 was protected for only 7 more years as of the beginning of 2019.

Required:

Prepare adjusting and correcting journal entries on December 31 for 2019.

To determine

Prepare an adjusting journal entry and correcting journal entry of Company C for the year ended December 31, 2019.

Explanation

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.

Prepare an adjusting journal entry and correcting journal entry of Company C for the year ended December 31, 2019 as follows:

DateAccounts Title and ExplanationPost Ref.Debit ($)Credit ($)
2018Retained earnings 50,000 
 Patents  50,000
 (To record the removal of research and development cost included )   

Table (1)

Description:

  • Retained earnings are the component of stockholder’s equity and it decreases the value of equity. Therefore, retained earnings account is debited with $50,000.
  • Patents are an asset account and it is decreased. Therefore, credit patents account with $50,000.
DateAccounts Title and ExplanationPost Ref.Debit ($)Credit ($)
2018Patents 8,000 
 Retained earnings  8,000
 (To record the cost of successful defense of patent)   

Table (2)

Description:

  • A Patent is an asset account and it is increased. Therefore, debit patents account with $8,000.
  • Retained earnings are the component of stockholder’s equity and it increases the value of equity. Therefore, retained earnings account is credited with $8,000.

Prepare correcting journal entry for patents:

In this case, the amortization for 2018 is wrongly recorded as $2,850 instead of $750. Hence, the difference amount of $2,100($8,000$7,200) (refer working note 1 and 2) is debited to the retained earnings account in order to rectify the error.

DateAccounts Title and ExplanationPost Ref.Debit ($)Credit ($)
2018Patents 2,100 
 Retained earnings  2,100
 (To record the correct amount of amortization of patent)   

Table (3)

Description:

  • A Patent is an asset account and it is increased. Therefore, debit patents account with $2,100.
  • Retained earnings are the component of stockholder’s equity and it increases the value of equity. Therefore, retained earnings account is credited with $2,100.

Working note (1):

Compute the recorded amount of amortization of patent for 2018:

Amortization recorded for 2018=Capitalized cost of patentEstimated life=$57,00020 years=$2,850

Working note (2):

Compute the correct amount of amortization of patent for 2018:

Correct amortization for 2018=[Cost of successful defense of patent+(Total cost of patentR&D cost)]Estimated life=$8,000+($57,000$50,000)20 years=$750

Record the amortization expense for 2019.

In this case, the amortization for 2019 is wrongly recorded as $4,429 instead of $6,322. Hence, the difference amount of $1,893($6,322$4,429) is debited to the retained earnings account in order to rectify the error

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