Chapter 9, Problem 6BP

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.

Straight-Line Method:

In straight-line deprecation method the asset is used evenly throughout its useful life. This is because the amount of depreciation in straight line remains same for all the years of the useful life of the asset.

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

Date	Account Title and Explanation	Post Ref	Debit ($)	Credit ($)
January 2, 2016	Copyrights		85,000
	Cash			85,000
	(To record the purchase of copyright.)

Table (1)

• A copyright is an asset (Intangible), and it increases the value of asset by $85,000. Therefore, debit copyright account by $85,000.
• Cash is an asset, and it is decreased by $85,000. Therefore, debit cash with $85,000.

Prepare a journal entry to record the loss that is covered by insurance as follows:

Date	Account Title and Explanation	Post Ref	Debit ($)	Credit ($)
March 1, 2016	Insurance Settlement Receivable		8,100
	Accumulated Depreciation – Dish antenna (4)		460
	Loss on disposal of Dish antenna (5)		620
	Dish antenna			9,180
	(To record the loss on disposal of Dish antenna.)

Table (2)

Working notes:

Compute the depreciation expenses for 2015:

$\begin{array}{c}\text{Annual Depreciation}=\frac{\text{Cost of the Asset }-\text{ Residual value}}{\text{Estimated Useful Life of the Asset}}\\ =\frac{\$9,180-\text{\$900}}{\text{12 Years}}\\ =\$690\end{array}$ (1)

Compute the depreciation expenses for 6 months (from July 1, 2015 to December 31 2015):

$\begin{array}{c}\text{Depreciation}=\frac{\text{Annual Depreciation}}{12}\times 6\\ =\frac{\$6\text{90}}{\text{6 years}}\\ =\$345\end{array}$ (2)

Compute the depreciation expenses for 2 months (from January 1, 2016 to March 1, 2016):

$\begin{array}{c}\text{Depreciation}=\frac{\text{Annual Depreciation}}{12}\times 2\\ =\frac{\$6\text{90}}{\text{6 years}}\\ =\$115\end{array}$ (3)

Compute the accumulated depreciation expenses for March 1, 2016):

$\begin{array}{c}\text{Depreciation}=\text{Depreciation of 2012 (2)}+\text{Depreciation of 2013 (3)}\\ =\$345+\$115\\ =\$460\end{array}$ (4)

Compute the Loss on disposal of dish antenna as on March 1, 2016):

$\begin{array}{c}\text{Depreciation}=\left[\begin{array}{l}\text{Cost of Dish antenna}-\text{Insurance }\\ \text{settlement}-\text{Accumulated Depreciation}\end{array}\right]\\ =\$9,180-\$8,100-\$460\\ =\$620\end{array}$ (5)

• Insurance settlement receivable is an asset, and it is increased by $8,100. Therefore, debit it with $8,100.
• Accumulated depreciation is a contra asset, and cancellation of contra account increases the asset. Therefore, debit Accumulated depreciation – by $805.
• Dish antenna is an asset, and it is decreased by $9,180. Therefore, credit Dish antenna account by $9,180.
• Loss on sale of dish antenna is loss and increased by $275. Therefore, debit the loss on sale of dish antenna with $275.

Prepare a journal entry to record the payment made for remodeling of space in a lease building as follows:

Date	Account Title and Explanation	Post Ref	Debit ($)	Credit ($)
April, 1 2016	Lease		140,000
	Cash			140,000
	(To record the payment made for remodeling of leased building)

Table (3)

• A Lease is an asset (Intangible), and it increases the value of asset by $140,000. Therefore, debit lease account by $140,000.
• Cash is an asset, and it is decreased by $140,000. Therefore, debit cash with $140,000.

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

Date	Account Title and Explanation	Post Ref	Debit ($)	Credit ($)
July, 1 2016	Patent		270,000
	Cash			270,000
	(To record the payment made for acquiring a patent.)

Table (4)

• A Patent is an asset (Intangible), and it increases the value of asset by $270,000. Therefore, debit patent account by $270,000.
• Cash is an asset, and it is decreased by $270,000. Therefore, debit cash with $270,000.

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

Date	Account Title and Explanation	Post Ref	Debit ($)	Credit ($)
November, 1 2016	Franchise		90,000
	Cash			90,000
	(To record the payment made to obtain franchise)

Table (5)

• A Franchise is an asset (Intangible), and it increases the value of asset by $90,000. Therefore, debit franchise account by $90,000.
• Cash is an asset, and it is decreased by $90,000. Therefore, debit cash with $90,000.

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, 2016	Amortization Expense – Copyright (1)		8,500
	Copyright			8,500
	(To record the amortization expense)

Table (6)

• An Amortization expenses-Copyright is an expense account and it is increased by $8,500. Expenses are the component of stockholder’s Equity and it decreases the value of equity. Therefore, debit Amortization expenses account with $8,500.
• A copyright is an asset (Intangible), and it decreases the value of asset by $8,500. Therefore, credit copyright account by $8,500.

Working Notes:

Compute the amortization expenses:

$\begin{array}{c}\text{Anortization expenses}=\frac{\text{Copyright}}{\left[\begin{array}{l}\text{Estimated Useful }\\ \text{Life of the Copyright}\end{array}\right]}\\ \text{=}\frac{\text{\$85,000}}{\text{10Years}}\\ \text{=}\text{\$8,500}\end{array}$ (1)

Prepare a journal entry to record the amortization expense for the payment made for remodeling of leased building as follows:

Date	Account Title and Explanation	Post Ref	Debit ($)	Credit ($)
December 31, 2016	Amortization Expense – Lease (2)		11,667
	Lease			11,667
	(To record the amortization expense)

Table (7)

• An Amortization expenses-Lease is an expense account and it is increased by $11,667. Expenses are the component of stockholder’s Equity and it decreases the value of equity. Therefore, debit Amortization expenses account with $11,667.
• A Lease is an asset (Intangible), and it decreases the value of asset by $11,667. Therefore, credit Lease account by $11,667.

Working Notes:

Compute the amortization expenses:

$\begin{array}{c}\text{Anortization expenses}=\frac{\text{Lease}}{\left[\begin{array}{l}\text{Estimated Useful }\\ \text{Life of the Lease}\end{array}\right]}\\ \text{=}\frac{\text{\$140,000}}{\text{12 Years}}\\ \text{=}\text{\$11,667}\end{array}$ (2)

Prepare a journal entry to record the amortization expense for the payment made for acquiring a patent as follows:

Date	Account Title and Explanation	Post Ref	Debit ($)	Credit ($)
December 31, 2016	Amortization Expense – Patent (3)		45,000
	Patent			45,000
	(To record the amortization expense)

Table (8)

• An Amortization expenses- Patent is an expense account and it is increased by $45,000. Expenses are the component of stockholder’s Equity and it decreases the value of equity. Therefore, debit Amortization expenses account with $45,000.
• A Patent is an asset (Intangible), and it decreases the value of asset by $45,000. Therefore, credit Patent account by $45,000.

Working Notes:

Compute the amortization expenses:

$\begin{array}{c}\text{Anortization expenses}=\frac{\text{Patent}}{\left[\begin{array}{l}\text{Estimated Useful }\\ \text{Life of the Lease}\end{array}\right]}\\ \text{=}\frac{\text{\$270,000}}{\text{6 years}}\\ \text{=}\text{\$45,000}\end{array}$ (3)

Prepare a journal entry to record the amortization expense for the payment made for acquiring a patent as follows:

Date	Account Title and Explanation	Post Ref	Debit ($)	Credit ($)
December 31, 2016	Amortization Expense – Franchise (4)		22,500
	Patent			22,500
	(To record the amortization expense)

Table (9)

• An Amortization expenses-Franchise is an expense account and it is increased by $22,500. Expenses are the component of stockholder’s Equity and it decreases the value of equity. Therefore, debit Amortization expenses account with $22,500.
• A Franchise is an asset (Intangible), and it decreases the value of asset by $22,500. Therefore, credit franchise account by $22,500.

Working Notes:

Compute the amortization expenses:

$\begin{array}{c}\text{Anortization expenses}=\frac{\text{Franchise}}{\left[\begin{array}{l}\text{Estimated Useful }\\ \text{Life of the Lease}\end{array}\right]}\\ \text{=}\frac{\text{\$90,000}}{\text{4 years}}\\ \text{=}\text{\$22,500}\end{array}$ (4)