11-13 Quizzes Flashcards
Grant Corporation purchases a copyright from Franklin Company on January 1, 2024 for $200,000 in cash. The copyright has a remaining legal life of 20 years. Grant feels the copyright will be useful for 10 years (end of 2033).
Assume that on January 1, 2028, the carrying amount of the copyright on Grant’s books is $120,000. During 2028, Grant spends $60,000 in legal fees (in cash) successfully defending a copyright suit. Grant determines the copyright will still be useful until the end of 2033. Prepare Grant’s journal entries to record:
a) Purchase of the copyright in 2024
b) Straight-line amortization for 2024
c) The successful defense of the copyright in 2028
d) Straight-line amortization for 2028
(a)
D - Copyright: 200,000
C - Cash: 200,000
(b)
200,000 / 10 = 20,000
D - Amortization Expense: 20,000
C - Copyright: 20,000
(c)
D - Copyright: 60,000
C - Cash (Legal Fees): 60,000
(d)
(120,000 + 60,000) / 6 = 30,000
D - Amortization Expense: 30,000
C - Copyright: 30,000
On January 1, 2024, Omega Corporation acquired Newton Enterprises for a cash payment of $475,000. On the date of purchase, Newton’s balance sheet showed assets of $800,000, liabilities of $350,000, and stockholders’ equity of $450,000.
An examination of Newton’s assets and liabilities showed that their land was overvalued by $10,000; the equipment was undervalued by $8,000; and the liabilities were overvalued by $6,000. Compute the amount of goodwill acquired by Omega.
Cash Paid: 475,000
Assets: 800,000
- Land: (10,000)
- Equipment: 8,000
- Total: 798,000
Liabilities: 350,000
- Liabilities: (6,000)
- Total: 344,000
Grand Total (798,000 - 344,000): 454,000
Goodwill (475,000 - 454,000): 21,000
Reagan Corporation owns a patent that has a carrying amount of $300,000. Reagan expects future net cash flows from this patent to total $310,000. The fair value of the patent is $285,000. Prepare the journal entry, if necessary, to record the loss on impairment. Write “No Entry” if there is no impairment loss.
Assets are impaired if Carrying Amount > Future Net Cash Flows
Recoverability Test: 310,000 > 300,000
Fails Impairment Test
No Entry
Green Corporation purchased March Company five years ago and at that time recorded Goodwill of $250,000. Today, the March Division of Green Corporation’s net identifiable assets, including the Goodwill, have a carrying amount of $2,000,000. The fair value of the division is estimated to be $1,920,000. Prepare Green’s journal entry, if necessary, to record impairment of the Goodwill. Write “No Entry” if there is no impairment loss.
Fair Value Test: 1,920,000 < 2,000,000
Impaired
Loss = 2,000,000 - 1,920,000 = 80,000
D - Loss on Impairment: 80,000
C - Goodwill: 80,000
On January 31, Philadelphia purchased a computer for $25,000 from Clarksville Company, paying $5,000 in cash and giving a one-year, 4% note for the balance. The equipment has an estimated useful life of 3 years, $1,000 salvage value, and Philadelphia Company uses straight-line depreciation.
On July 10, Philadelphia Company purchased goods from Chicago Company for $30,000, terms 2/15, n/30. Purchases and accounts payable are recorded at net amounts. Philadelphia uses a periodic inventory system. The invoice was paid on July 21.
On November 1, Philadelphia Company borrowed $20,000 by signing a $22,000, one-year zero-interest-bearing note at Third State Bank.
Prepare the journal entries necessary to record the transactions on the dates above and prepare the adjusting entries necessary at December 31, 2025.
1/31:
D - Computer: 25,000
C - Cash: 5,000
C - Notes Payable, 4%: 20,000
7/10:
D - Purchases (30,000 x 0.98): 29,400
C - Accounts Payable: 29,400
7/21:
D - Accounts Payable: 29,400
C - Cash: 29,400
11/1:
D - Cash: 20,000
D - Discount on Notes Payable: 2,000
C - Notes Payable: 22,000
12/31 (adjusting entries):
20,000 x 0.04 x 11/12 = 733
D - Interest Expense: 733
C - Interest Payable: 733
((25,000 - 1,000) / 3) x 11/12 = 7,333
D - Depreciation Expense: 7,333
C - Accumulated Depreciation: 7,333
2,000 x 2/12 = 333
D - Interest Expense: 333
C - Discount on Notes Payable: 333
Gatsby Office Equipment Company sold 100 copiers during 2025 at $12,000 each. Each copier is covered by an assurance-type warranty included int he sales price. During 2025, Gatsby spent $25,000 servicing the two-year warranties. All applicable transactions are on a cash basis.
Prepare the 2025 journal entering for Gatsby. Assume that Gatsby estimates the total cost of servicing the warranties will be $75,000 for the two years.
D - Cash: 1,200,000
C - Sales (100 x 12,000): 1,200,000
D - Warranty Expense: 25,000
C - Cash: 25,000
Adjusting Entry:
D - Warranty Expense: 50,000
C - Warranty Liability: 50,000
Assume that the 100 copiers are sold for $12,000 each and that customers for 25 of those copiers also purchased a two-year service-type warranty for $150 each. During 2025, Gatsby spent $750 servicing the two-year warranties. Gatsby estimates the total cost of servicing the warranties will be $2,000 for the two years.
D - Cash: 1,203,750
C - Sales (100 x 12,000): 1,200,000
C - Unearned Warranty Revenue (25 x 150): 3,750
D - Warranty Expense: 750
C - Cash: 750
Adjusting Entry:
D - Unearned Warranty Revenue (3,750 / 2): 1,875
C - Warranty Revenue: 1,875
Morse Company issues $5,000,000, 6%, 5-year bonds on January 1, 2024. The bonds pay interest semiannually on June 30 and December 31. The bonds are issued to yield an effective rate of 5%. What are the proceeds from the bond issue?
Semiannual Interest: 5,000,000 x 6% x 1/2 = 150,000
Periods: 5 years x 2 = 10
Effective Rate: 5% / 2 = 2.5%
Present value of a single sum for 10 periods:
5,000,000 x 0.78120 = 3,906,000
Present value of an annuity for 10 periods:
150,000 x 8.75206 = 1,312,808
3,906,000 + 1,312,808 = 5,218,809
Washburn, Inc. issued $4,000,000; 6%, 5-year bonds on January 1, 2024 and received cash totaling $4,175,047. (Also can be stated as being issued at 104.37615) The bonds pay interest semiannually on June 30 and December 31. The company uses the effective-interest method of amortizing discounts and premiums. The bonds were sold to yield an effective interest rate of 5%.
Interest: 4,000,000 x 0.06 x 1/2= 120,000
1/1:
D - Cash: 4,175,047
C - Premium on Bonds Payable: 175,047
C - Bonds Payable: 4,000,000
6/30:
D - Interest Expense: 104,376
D - Premium on Bonds Payable: 15,624
C - Cash: 120,000
12/31:
D - Interest Expense: 103,986
D - Premium on Bonds Payable: 16,014
C - Cash: 120,000
Key, Inc. issued $4,000,000; 5%, 5-year bonds on January 1, 2024 and received cash totaling $3,829,380. (Also can be stated as being issued at 95.7345) The bonds pay interest semiannually on June 30 and December 31. The company uses the effective-interest method of amortizing discounts and premiums. The bonds were sold to yield an effective interest rate of 6%.
Interest: 4,000,000 x 0.05 x 1/2 = 100,000
1/1:
D - Cash: 3,829,380
D - Discount on Bonds Payable: 170,620
C - Bonds Payable: 4,000,000
6/30:
D - Interest Expense: 114,881
C - Discount on Bonds Payable: 14,881
C - Cash: 100,000
12/31:
D - Interest Expense: 115,328
C - Discount on Bonds Payable: 15,328
C - Cash: 100,000
