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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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Bailey Company was formed in January 2017 and is preparing its financial statements under GAAP for the first time at the end of 2019. Its general ledger at December 31, 2019 includes the following assets:

Chapter 12, Problem 5P, Bailey Company was formed in January 2017 and is preparing its financial statements under GAAP for

As the recently hired accountant for Bailey, you have been asked to make sure that the company’s accounting for intangible assets follows GAAP. Based on your investigation, you determine the following:

  • The patent acquired in January 2019 has an expected life of 15 years and no residual value, and it will generate approximately equal benefits each year.
  • Bailey will use the copyright and trade name for the foreseeable future.
  • The computer software was purchased in January 2019 and is used in the Bailey’s 20 offices around the country. It is expected to be replaced with new software at the beginning of 2021.
  • Bailey previously capitalized the expected value of its “human resources” as intellectual capital, with a corresponding increase in additional paid-in capital.
  • The trade name and goodwill arose from an acquisition of a subsidiary company at the end of 2018. Because of a significant adverse change in the market, you decide that both assets are impaired. You estimate that the fair value of the trade name is $50,000. The subsidiary company, which qualities as a reporting unit, has a book value of $500,000, including the goodwill of $90,000. You estimate that the subsidiary’s fair value is $430,000.

Required:

Assume no adjusting entries have been made. Prepare journal entries to provide the correct information under GAAP at the end of 2019.

To determine

Journalize the given transaction.

Explanation

Amortization expense: The expense which reflects the usage of intangible asset by the way of reducing the cost of the asset for the estimated useful definite life, is referred to as amortization expense.

Formula for amortization expense:

Amortization expense=Cost of intangible asset×1Useful life

Record the amortization expenses as on December 31, 2019 in a journal format:

DateAccount Title and ExplanationPost Ref

Debit

($)

Credit ($)
December 31, 2019Amortization Expense –patent (1) 8,000 
 Patent  8,000
 (To record the amortization expense of patent)   

Table (1)

  • An amortization expenses-Patent is an expense account and it is increased by $8,000. Expenses are the component of equity and it decreases the value of equity. Therefore, debit the amortization expenses account with $8,000.
  • Patent is an asset, and it is decreased by $8,000. Therefore, credit patent with $8,000.

Working note (1):

Compute the amortization expenses:

Amortization expenses=Patent[Estimated Useful Life of the patent]=$120,00015 years=$8,000

Record the amortization expenses as on December 31, 2019 in a journal format:

DateAccount Title and ExplanationPost Ref

Debit

($)

Credit ($)
December 31, 2019Amortization Expense –Computer software (2) 45,000 
 Computer software  45,000
 (To record the amortization expense of computer software)   

Table (2)

  • Amortization expenses-computer software is an expense account and it is increased by $45,000. Expenses are the component of equity and it decreases the value of equity. Therefore, debit amortization expenses account with $45,000.
  • Computer software is an asset, and it is decreased by $45,000. Therefore, credit computer software with $45,000.

Working note (2):

Compute the amortization expenses:

Amortization expenses=Patent[Estimated Useful Life of the patent]=$90,0002 years=$45,000

Record the decrease in retained earnings in a journal format:

DateAccount Title and ExplanationPost Ref

Debit

($)

Credit ($)
2019Retained earnings  30,000 
 Start-Up Costs  30,000
 (To record the decrease in retained earnings)   

Table (3)

  • Retained earnings are a component of stockholders’ equity and it decreases the value of equity

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