Chapter 9, Problem 6AP

a.

To determine

Prepare journal entries to record the given transactions.

Explanation of Solution

Disposal of Assets:

Disposal is an activity of selling the worn-out assets that is no longer in need for the business, in return of some consideration. Disposal may be made in any of the following situations:

• Disposal with no gain no loss: When the asset is disposed of with no consideration received.
• Disposal with gain: When the asset is disposed of for more than its book value (original cost less accumulated depreciation).
• Disposal with loss: When the asset is disposed of for less than its book value.

Prepare a journal entry to record the payment of annual rent for the leased building as follows:

Date	Account Title and Explanation	Post Ref	Debit ($)	Credit ($)
January 2	Prepaid rent		23,400
	Cash			23,400
	(To record the payment of rent.)

Table (1)

• Prepaid rent is an asset, and it increases the value of asset by $23,400. Therefore, debit prepaid rent account by $23,400.
• Cash is an asset, and it is decreased by $23,400. Therefore, debit cash with $23,400.

Prepare a journal entry to record the payment made for the installation of Oak floor in the leased building as follows:

Date	Account Title and Explanation	Post Ref	Debit ($)	Credit ($)
January 3	Lease		22,800
	Cash			22,800
	(To record the payment made for the installation of Oak floor in the leased building)

Table (2)

• A Lease is an asset (Intangible), and it increases the value of asset by $22,800. Therefore, debit lease account by $22,800.
• Cash is an asset, and it is decreased by $22,800. Therefore, debit cash with $22,800.

Prepare a journal entry to record the payment made to obtain franchise as follows:

Date	Account Title and Explanation	Post Ref	Debit ($)	Credit ($)
March, 1 2013	Franchise		45,000
	Cash			45,000
	(To record the payment made to obtain franchise)

Table (3)

• A Franchise is an asset (Intangible), and it increases the value of asset by $45,000. Therefore, debit franchise account by $45,000.
• Cash is an asset, and it is decreased by $45,000. Therefore, debit cash with $45,000.

Prepare a journal entry to record the payment made for designing a trademark as follows:

Date	Account Title and Explanation	Post Ref	Debit ($)	Credit ($)
July, 1 2013	Trademark		38,000
	Cash			38,000
	(To record the payment made for designing a trademark)

Table (4)

• A Trademark is an asset (Intangible), and it increases the value of asset by $38,000. Therefore, debit trademark account by $38,000.
• Cash is an asset, and it is decreased by $38,000. Therefore, debit cash with $38,000.

Prepare a journal entry to record the payment made for advertisement as follows:

Date	Account Title and Explanation	Post Ref	Debit ($)	Credit ($)
July, 1 2013	Advertisement expenses		25,000
	Cash			25,000
	(To record the payment made for advertisement expenses)

Table (5)

• An advertisement expense is an expense account and it is increased by $25,000. Expenses are the component of stockholder’s Equity and it decreases the value of equity. Therefore, debit Advertisement expenses account with $25,000.
• Cash is an asset, and it is decreased by $25,000. Therefore, debit cash with $25,000.

b.

To determine

Prepare the journal entry to record the depreciation and amortization expenses as on December 31 for the assets acquired during the year.

Explanation of Solution

Prepare a journal entry to record the amortization expense for the purchase of copyright for romantic novels as follows:

Date	Account Title and Explanation	Post Ref	Debit ($)	Credit ($)
December 31	Rent expenses		23,400
	Prepaid rent			23,400
	(To record the rent expense for the year)

Table (6)

• A rent expense is an expense account and it is increased by $23,400. Expenses are the component of stockholder’s Equity and it decreases the value of equity. Therefore, debit rent expenses account with $23,400.
• Prepaid rent is an asset, and it decreases the value of asset by $23,400. Therefore, credit prepaid rent account by $23,400.

Prepare a journal entry to record the amortization expense for the payment made for the installation of Oak floor in the leased building as follows:

Date	Account Title and Explanation	Post Ref	Debit ($)	Credit ($)
December 31	Amortization Expense – Lease (1)		456
	Lease			456
	(To record the amortization expense)

Table (7)

• An Amortization expenses-Lease is an expense account and it is increased by $456. Expenses are the component of stockholder’s Equity and it decreases the value of equity. Therefore, debit Amortization expenses account with $456.
• A Lease is an asset (Intangible), and it decreases the value of asset by $456. Therefore, credit Lease account by $456.

Working Notes:

Compute the amortization expenses:

$\begin{array}{c}\text{Anortization expenses}=\frac{\text{Lease}}{\left[\begin{array}{l}\text{Estimated Useful }\\ \text{Life of the Lease}\end{array}\right]}\\ \text{=}\frac{\text{\$22,800}}{\text{50 years}}\\ \text{=}\text{\$456}\end{array}$ (1)

Prepare a journal entry to record the amortization expense for the payment made to obtain franchise as follows:

Date	Account Title and Explanation	Post Ref	Debit ($)	Credit ($)
December 31	Amortization Expense – Franchise (2)		9,000
	Patent			9,000
	(To record the amortization expense)

Table (9)

• An Amortization expenses-Franchise is an expense account and it is increased by $9,000. Expenses are the component of stockholder’s Equity and it decreases the value of equity. Therefore, debit Amortization expenses account with $9,000.
• A Franchise is an asset (Intangible), and it decreases the value of asset by $9,000. Therefore, credit franchise account by $9,000.

Working Notes:

Compute the amortization expenses:

$\begin{array}{c}\text{Anortization expenses}=\frac{\text{Franchise}}{\left[\begin{array}{l}\text{Estimated Useful }\\ \text{Life of the Lease}\end{array}\right]}\\ \text{=}\frac{\text{\$45,000}}{\text{5 years}}\\ \text{=}\text{\$9,000}\end{array}$ (2)

Prepare a journal entry to record the amortization expense for the payment made for designing a trade mark as follows:

Date	Account Title and Explanation	Post Ref	Debit ($)	Credit ($)
December 31	Amortization Expense –Trademark (3)		760
	Trademark			760
	(To record the amortization expense)

Table (8)

• An Amortization expenses-Franchise is an expense account and it is increased by $760. Expenses are the component of stockholder’s Equity and it decreases the value of equity. Therefore, debit Amortization expenses account with $760.
• A Trademark is an asset (Intangible), and it decreases the value of asset by $760. Therefore, credit Trademark account by $760.

Working Notes:

Compute the amortization expenses:

$\begin{array}{c}\text{Anortization expenses}=\frac{\text{Trademark}}{\left[\begin{array}{l}\text{Estimated Useful }\\ \text{Life of the Lease}\end{array}\right]}\\ \text{=}\frac{\text{\$38,000}}{\text{50 years}}\\ \text{=}\text{\$760}\end{array}$ (3)