Exam 1 Problems Flashcards
Yellow Corporation purchases a patent from Ferris Company on January 1, 2026 for $180,000 in cash. The patent has a remaining legal life of 10 years. Yellow fells the patent will be useful for 6 years (end of 2031).
Assume that on January 1, 2028, the carrying amount of the patent on Yellow’s books is $120,000. During 2028, Yellow spends $20,000 in legal fees (credit cash) successfully defending a patent suit. Yellow determines the patent will still be useful until the end of 2031. Prepare Yellow’s journal entries to record:
a) Purchase of the patent in 2026
b) Straight-line amortization for 2026
c) The successful defense of the patent in 2028
d) Straight-line amortization for 2028
a)
D - Patent: 180,000
C - Cash: 180,000
b)
180,000 / 6 = 30,000
D - Amortization Expense: 30,000
C - Patent: 30,000
c)
D - Patent: 20,000
C - Cash: 20,000
d)
(120,000 + 20,000) / 4 = 35,000
D - Amortization Expense: 35,000
C - Patent - 35,000
On January 1, 2026, AirWorld Corporation acquired Brown Enterprises for a cash payment of $550,000. On the date of purchase, Brown’s balance sheet showed assets of $900,000, liabilities of $425,000, and stockholders’ equity of $475,000. An examination of Brown’s assets and liabilities showed that their land was undervalued by $10,000; the equipment was undervalued by $7,000; and the liabilities were overvalued by $3,000. Compute the amount of goodwill acquired by AirWorld.
Cash payment: 550,000
Assets: 900,000
+ Land: 10,000
+ Equipment: 7,000
= 917,000
Liabilities: 425,000
- 3,000
= 422,000
Net assets: 917,000 - 422,000 = 495,000
Goodwill: 550,000 - 495,000 = 55,000
$55,000
Morton Corporation owns a patent that has a carrying amount of $300,000. Wallace 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 and explain why.
No Entry
300,000 (CV) < 310,000 (Cash flow)
No impairment
Walter Corporation purchased May Company five years ago and at that time recorded Goodwill of $250,000. May Division’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 Walter’s journal entry, if necessary to record the impairment of the goodwill. Write “No Entry” if there is no impairment loss and explain why.
2,000,000 (CV) > 1,920,000 (FV)
Impaired
Loss: 2,000,000 - 1,920,000 = 80,000
D - Loss on Impairment: 80,000
C - Goodwill: 80,000
Described below are selected transactions of Symeon Company for 2025:
- On February 28, Symeon purchased land for $50,000 from Little Company, paying $10,000 in cash and giving a one-year, 6% note for the balance.
- On September 30, Symeon Company purchased machinery costing $50,000. They paid for the machinery by signing a $55,000, five-month zero-interest-bearing note at State Bank. The machinery has an estimated useful life of 6 years and no salvage value. Symeon uses straight-line depreciation.
- On October 20, Symeon Company purchased goods from Marah Company for $20,000, terms 3/15, n/45. Purchases and accounts payable are recorded at gross amounts. Symeon uses a perpetual inventory system. The invoice was paid on October 31.
Prepare the journal entries necessary to record the transactions on the dates above and prepare the adjusting entries necessary at December 31, 2025.
2/28/25:
D - Land: 50,000
C - Cash: 10,000
C - Note Payable: 40,000
9/30/25:
D - Machinery: 50,000
D - Discount on Note Payable: 5,000
C - Note Payable: 55,000
10/20/25:
D - Inventory: 20,000
C - Accounts Payable: 20,000
10/31/25:
D - Accounts Payable: 20,000
C - Inventory: 600
C - Cash: 19,400
12/31/25 (Adjusting Entries):
40,000 x 6% x (10 / 12): 2,000
D - Interest Expense: 2,000
C - Interest Payable: 2,000
(5,000 / 5) x 3 = 3,000
D - Interest Expense: 3,000
C - Discount on Notes Payable: 3,000
(50,000 / 6) x (3 /12) = 2,083
D - Depreciation Expense: 2,083
C - Accumulated Depreciation: 2,083
Thayer Computer Company sold 600 laptops during 2026 at $2,000 each, for cash. Also, during 2026, Thayer spent $18,000 servicing the two-year warranties that accompanied the laptops. All applicable transactions are on a cash basis. Prepare the 2026 journal entries for Thayer assuming these are assurance-type warranties and that Thayer estimates the total cost of servicing the warranties over the two years will be $35,000.
D - Cash: 1,200,000
C - Sales: 1,200,000
D - Warranty Expense: 18,000
C - Cash: 18,000
35,000 - 18,000 = 17,000
D - Warranty Expense: 17,000
C - Warranty Liability: 17,000
Thayer Computer Company sold 600 laptops during 2026 at $2,000 each, for cash. Also, during 2026, Thayer spent $18,000 servicing the two-year warranties that accompanied the laptops. All applicable transactions are on a cash basis. Prepare the 2026 journal entries for Thayer assuming these are assurance-type warranties and that Thayer estimates the total cost of servicing the warranties over the two years will be $35,000.
Now assume that the 600 laptops were sold for $1,850 each and that customers for 250 of those laptops also purchased for $150 a two-year warranty. During 2026, Thayer spent $18,000 servicing the two-year warranties. Thayer estimates the total cost of servicing the warranties will be $35,000 for the two years.
D - Cash: 1,110,000
C - Sales: 1,110,000
D - Cash: 37,500
C - Unearned Warranty Revenue: 37,500
D - Warranty Expense: 18,000
C - Cash: 18,000
37,500 / 2 = 18,750
D - Unearned Warranty Revenue: 18,750
C - Warranty Revenue: 18,750
Skinner Company issues $3,000,000, 6%, 8-year bonds on January 1, 2025. The bonds pay interest semiannually on June 30 and December 31. The bonds are issued to yield an effective rate of 8%. What are the proceeds from the bond issue?
3,000,000 x 6% x (1 / 2): 90,000
Semiannual calculations:
8 x 2 = 16
8% / 2 = 4%
PV$: 3,000,000 x 0.53391 = 1,601,730
PVOA: 90,000 x 11.6523 = 1,048,707
1,601,730 + 1,048,707 = 2,650,437
$2,650,437
Morgan, Inc. issued $5,000,000; 10%, 10-year bonds on January 1, 2025 and received cash totaling $4,426,480. 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 12%.
Show the calculations for the effective interest method of amortization through December 31, 2026 in the table.
Morgan, Inc. issued $5,000,000; 10%, 10-year bonds on January 1, 2025 and received cash totaling $4,426,480. 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 12%.
Record the journal entries needed on the following dates:
- 1/1/25
- 6/30/25
- 6/30/26
1/1/25:
D - Cash: 4,426,480
D - Discount on Bonds Payable: 573,520
C - Bonds Payable: 5,000,000
6/30/25:
D - Interest Expense: 265,589
C - Discount on Bonds Payable: 15,589
C - Cash: 250,000
6/30/26:
D - Interest Expense: 267,516
C - Discount on Bonds Payable: 17,516
C - Cash: 250,000
