Chapter 11 Flashcards
Taylor Swift Corporation purchases a patent from Salmon Company on January 1, 2025, for $54,000. The patent has a remaining legal life of 16 years. Taylor Swift estimates the patent will have a useful life of 10 years, based on expected product innovations in the market. Prepare Taylor Swift’s journal entries to record the purchase of the patent and 2025 amortization.
1/1:
D - Patents: 54,000
C - Cash: 54,000
12/31:
D - Amortization Expense: 5,400
C - Patents (54,000 x 1/10): 5,400
Taylor Swift Corporation purchases a patent from Salmon Company on January 1, 2025, for $54,000. The patent has a remaining legal life of 16 years. Taylor Swift estimates the patent will have a useful life of 10 years, based on expected product innovations in the market. Prepare Taylor Swift’s journal entries to record the purchase of the patent and 2025 amortization.
Use the information provided in the above problem. Assume that at January 1, 2027, the carrying amount of the patent on Taylor Swift’s books is $43,200. In January, Taylor Swift spends $24,000 successfully defending a patent suit. Taylor Swift still feels the patent will be useful until the end of 2034. Prepare the journal entries to record the $24,000 expenditure and 2027 amortization.
1/1:
D - Patents: 24,000
C - Cash: 24,000
12/31
D - Amortization Expense: 8,400
C - Patents ((43,200 + 24,000) x 1/8) = 8,400
Stephen Curry, Inc., spent $68,000 in attorney fees while developing the trade name of its new product, the Mean Bean Machine. Prepare the journal entries to record the $68,000 expenditure and the first year’s amortization, using an 8-year life.
D - Trade Names: 68,000
C - Cash: 68,000
D - Amortization Expense: 8,500
C - Trade Names (68,000 x 1/8): 8,500
Gershwin Corporation obtained a franchise from Sonic Hedgehog Inc. for a cash payment of $120,000 on April 1, 2025. The franchise grants Gershwin the right to sell certain products and services for a period of 8 years. Prepare Gershwin’s April 1 journal entry and December 31 adjusting entry.
4/1:
D - Franchise: 120,000
C - Cash: 120,000
12/31:
D - Amortization Expense: 11,250
C - Franchise (120,000 / 8 * 9/12): 11,250
On September 1, 2025, Winans Corporation acquired Aumont Enterprises for a cash payment of $700,000. At the time of purchase, Aumont’s balance sheet showed assets of $620,000, liabilities of $200,000, and stockholders’ equity of $420,000. The fair value of Aumont’s assets is estimated to be $800,000. Compute the amount of goodwill recorded by Winans in the acquisition.
Purchase price: 700,000
Fair value of assets - Fair value of liabilities = Fair value of net assets
800,000 - 200,000 = 600,000
700,000 - 600,000 = 100,000
Value assigned to goodwill: 100,000
Kenoly Corporation owns a patent that has a carrying amount of $300,000. Kenoly expects future net cash flows from this patent to total $210,000. The fair value of the patent is $110,000. Prepare Kenoly’s journal entry, if necessary, to record the loss on impairment.
Carrying Amount > Future Net Cash Flows
300,000 > 210,000
300,000 - 110,000 = 190,000
D - Loss on Impairment: 190,000
C - Patents (300,000 - 110,000): 190,000
Waters Corporation purchased Johnson Company 3 years ago and at that time recorded goodwill of $400,000. The Johnson Division’s net assets, including the goodwill, have a carrying amount of $800,000. The fair value of the division is estimated to be $1,000,000. Prepare Waters’ journal entry, if necessary, to record impairment of the goodwill.
Carrying Amount < Fair Value = Not Impaired
800,000 < 1,000,000
No entry
Waters Corporation purchased Johnson Company 3 years ago and at that time recorded goodwill of $400,000. The Johnson Division’s net assets, including the goodwill, have a carrying amount of $800,000. The fair value of the division is estimated to be $1,000,000. Prepare Waters’ journal entry, if necessary, to record impairment of the goodwill.
Use the information provided in the above problem. Assume that the fair value of the division is estimated to be $750,000. Prepare Waters’ journal entry, if necessary, to record impairment of the goodwill.
Carrying Amount > Fair Value = Impaired
800,000 > 750,000
D - Loss on Impairment (800,000 - 750,000): 50,000
C - Goodwill: 50,000
Nieland Industries had one patent recorded on its books as of January 1, 2025. This patent had a book value of $288,000 and a remaining useful life of 8 years. During 2025, Nieland incurred research and development costs of $96,000 and brought a patent infringement suit against a competitor. On December 1, 2025, Nieland received the good news that its patent was valid and that its competitor could not use the process Nieland had patented. The company incurred $85,000 to defend this patent. At what amount should patent(s) be reported on the December 31, 2025, balance sheet, assuming monthly amortization of patents?
Patent (1/1):
288,000 / 96 = 3,000 * 12 = 36,000
Legal costs (12/1):
85,000 / 85 = 1,000 * 1 = 1,000
Carrying Amount: 288,000 + 85,000 = 373,000
Less: Amortization of Patent: 12 * 3,000 = 36,000
Less: Legal costs amortization: (1 * 1,000) = 1,000
373,000 - 36,000 - 1,000 = 336,000
Carrying Amount (12/31):
336,000
Sinise Industries acquired two copyrights during 2025. One copyright related to a textbook that was developed internally at a cost of $9,900. This textbook is estimated to have a useful life of 3 years from September 1, 2025, the date it was published. The second copyright (a history research textbook) was purchased from University Press on December 1, 2025, for $24,000. This textbook has an indefinite useful life. How should these two copyrights be reported on Sinise’s balance sheet as of December 31, 2025?
Copyright No. 1 for $9,900 should be EXPENSED and therefore not reported on the balance sheet.
Copyright No. 2 for $24,000 should be CAPITALIZED. Because the useful life is INDEFINITE, copyright No. 2 should be tested at least annually for impairment using a fair value test. It would be reflected on the 12/31 2025 balance sheet at its cost of $24,000.
R. Wilson Corporation commenced operations in early 2025. The corporation incurred $60,000 of costs such as fees to underwriters, legal fees, state fees, and promotional expenditures during its formation. Prepare journal entries to record the $60,000 expenditure and 2025 amortization, if any.
D - Organization Expense: 60,000
C - Cash: 60,000
Treasure Land Corporation incurred the following costs in 2025:
- Cost of laboratory research aimed at discovery of new knowledge: 120,000
- Cost of testing in search for product alternatives: 100,000
- Cost of engineering activity required to advance the design of a product to the manufacturing stage: 210,000
Total: 430,000
Prepare the necessary 2025 journal entry or entries for Treasure Land.
D - Research and Development Expense: 430,000
C - Cash: 430,000
Indicate whether the following items are capitalized or expensed in the current year.
a. Purchase cost of a patent from a competitor.
b. Research and development costs.
c. Organizational costs.
d. Costs incurred internally to create goodwill.
(a) Capitalize
(b) Expense
(c) Expense)
(d) Expense
