chapter12 - answer

8/10/2019 Chapter12 - Answer

1/26

12-1. The decision whether a given expenditure on intangible asset to be treated as

expense or asset requires judgment. Expenditure giving rise to future benefits will

be classified as assets while those expenditure the future benefits from which are

uncertain are charged of as expense in the year incurred. The expected benefitfrom the intangible assets can be assessed in terms of the following:

a) Patents: Actual production of the goods covered by the patent

b) Goodwill: eview of actual excess income as well as actual income of the

investeec) Trademark ! Tradename: "ontinuous production of the product covered by

the trademar#!tradename.

12-2. esearch and $evelopment "osts vary widely among companies. %anyexpenditures do have future worth& while others are so highly uncertain as to

future value that recording them as assets is clearly improper.

The auditor's interest in auditing esearch and $evelopment costs stems from theobjective of determining whether they should be deferred or charged against

current operations. (e shall be guided by AA* in judging whether the client's

treatment of the esearch and $evelopment "osts is justified or not.

12-3. Menfro, Inc.

The rapid amorti+ation of the leasehold for the first twelve ,-) years resulted to

an understatement of income totaling to */0&000:

"orrect amorti+ation *120&000 x - *30&0000

Amorti+ation per client ,*3&200 x -) 440&000

5ver6amorti+ation * /0&000

7n view of the above& the amount of */0&000 should be added bac# to etainedEarnings as correction of prior years' profits. 8urthermore& amorti+ation of

*&200 for the -4th

year should be recorded.

These adjustments would result to a net increase in the etained Earnings balance

which will enable the company to declare dividends without depleting theetained Earnings balance significantly.

CHAPTER

12 SUBSTANTIVE TESTS OFINTANGIBLE ASSETS


2/26

12-2 Solutions Manual to Accompany Applied Auditing, 2006 Edition

12-4. Reuirement !a"

The annual depreciation for years -- to 2 is *-&//3. 9y the end of the 2thyear&

the building would be fully depreciated. ,20&000 ; 2&000) ! -2 years)

Reuirement !#"

7f the original lease had contained a renewal clause for an additional 0 years& the

depreciation rate would still be 2


3/26

Su#stanti*e Tests o( +ntangi#le Assets 12-3

Adusting -ournal Entries

,-) "apital in excess of par value B0&000.00

*atent * -0&000.00

*atent @ 40&000.00*atent 10&000.00

To adjust patent valuation to conform

to 97 requirement.

,) Accumulated amorti+ation ; *atent * 2&-2-.2Accumulated amorti+ation ; *atent @ -2&000.00

Accumulated amorti+ation ; *atent 0&000.00

etained earnings ; "orrection of prior

years' profit 10&-2-.2

To adjust amorti+ation provision from->>3 to 002.

12-6. Cartwright Corporation

.ote to +nstructor: 8or ease of discussion& the adjusting entries in the solution are

dated to correspond with the original erroneous journal entries. 7n actual practice&

they would be dated as of the year6end.

Can. - 5rgani+ation Expenses -3&200

7ntangibles -3&200

To classify incorporation fees.

-0 5rgani+ation Expenses 3&200

7ntangibles 3&200To classify legal fees for the

organi+ation of the company.

2 Advertising Expense -2&000

7ntangibles -2&000

To expense advertising costs.

Apr. - Dand -2&000

9uilding 0&0007ntangibles 42&000

To reclassify land and buildings for

$ activities.

%ay -2 esearch and $evelopment Expenses -2&0007ntangibles -2&000

To expense materials purchased.

Alternatively& unused materials and

supplies& if material& may be set up as


4/26


prepaid expenses.

Cune 40 *atent -0&0007ntangibles -0&000

To reclassify the patent.

Culy - 7ncome =ummary ! etained Earnings -&000

7ntangibles -&000

To record operating loss.

$ec. -0 esearch and $evelopment Expenses -&000

7ntangibles -&000

To record acquisition of equipment.

4- esearch and $evelopment Expenses 40&000

7ntangibles 40&000To expense $ costs.

4- esearch and $evelopment Expenses 320

Accumulated $epreciation: 9uilding 320

To record F year depreciation on $ building ,06year life) from

April - entry.

4- Amorti+ation Expense 20*atent 20

To record G year amorti+ation ,06

year life) on Cune 40 patent.

*A= 4B prohibits capitali+ation of start6up expenses such as organi+ation costs.Ho amorti+ation should therefore be recorded.

12-7. Harper, Inc.

/alculation o( Goodwill

Average year6end net assets:

,*&100&000 2) * 1B0&000

Average annual earnings

,*100&000 2) * B0&000

Dess: Hormal return on average year6end assets

,-0< x *1B0&000) 1B&000Excess annual earnings * 4&000

Excess annual earnings capitali+ed at 0< or Goodwill

*4&000 -< ? *-/0&000


5/26


12-8. Bayer, Inc.

%ayer, +nc) ead, +nc)

Het tangible assets per records& Hov. -& 00/ *4B&200 *>B&200

Add: Agreed increase in value of equipment 10&000

Het adjusted tangible assets *4/B&200 *>B&200

Add: Ialue of oodwill ,=chedules - ) 31&>00 -&>00

Total amount to be paid for net tangible assets

and goodwill *114&100 *4--&100

Supporting /omputations1

Scedule &1 Goodwill o( %ayer, +nc)

Average pre6tax earnings --.-.0- to --.-.0/ *B&000

Dess: Additional annual depreciation equipment ta#en over

at *10&000 in excess of boo# value ,*10&000 ! 2) B&000Adjusted pre6tax earnings *31&000

Dess: equired earnings on net tangible assets

,-2< x *4/B&200) 22&32

Excess annual pre6tax earnings *-B&32

oodwill ,excess earnings capitali+ed at 200

Scedule 21 Goodwill o( ead, +nc)

Average pre6tax earnings --.-.0- to --.-.0/ *11&000

Dess: Adjustment for effect of organi+ation cost written off

in 002 ,*0&000 ! 2) 1&000

Adjusted pre6tax earnings *1B&000Dess: equired earnings on net tangible assets

,-2< x *>B&200) 11&332

Excess annual pre6tax earnings * 4&2

oodwill ,excess earnings capitali+ed at 200

12-9. Phoenix Supply Company

Reuirement !a"

Allocation of the *-43&200 cost to the individual assets in the group of assets

acquired is based on the relative fair value of the individual assets.


6/26


AssetAppraisal

3aluePortion o(Total 3alue

Total/ost

Allocated/ost

*atent A * 40&000 40!-2-.3 x *-43&200 ? * 3&->

*atent 9 10&000 10!-2-.3 x -43&200 ? 4/&2/

Equipment ->&300 ->.3!-2-.3 x -43&200 ? -3&B2/

Dand /&000 /!-2-.3 x -43&200 ? 2/&->/

*-2-&300 *-43&200

Cournal entries for 001& 002 and 00/& relative to intangible assets& are as

follows:

2004

Apr. 3 *atent A 3&->*atent 9 4/&2/

Equipment -3&B2/

Dand 2/&->/

"ash -43&200To record the acquisition of assets.

5ct. 4- Amorti+ation of *atents 1&40

*atent A ,3&-> ! 2 x /!-) &3->*atent 9 ,4/&2/ ! - x /!-) -&2--

To record amorti+ation of patentsfor 001.

2005

%ar. 3 Degal Expenses -3&/00

"ash -3&/00To record legal fees related to defense

of patents.

%ar. 3 Amorti+ation of *atents -&B-4*atent A -&B-4

To record amorti+ation on *atent A

to date of write6off ,Hov. 001 to

8eb. 002).

%ar. 3 Doss on *atent A &//0

*atent A &//0

To record write6off of *atent A after


7/26


unsuccessful defense.

5ct. 4- Amorti+ation of *atents 4&0-*atent 9 4&0-

To record amorti+ation of *atent 9 for 002.

2006

5ct. 4- Amorti+ation of *atents 4&0-

*atent 9 4&0-

To record amorti+ation on *atent 9 for 00/.

/omputations

Amorti+ation for 00/:*atent A: ,*3&-> ! 2 years) ,/ ! -) * &3->

*atent 9: ,*4/&2/ ! - years) ,/ ! -) -&2--* 1&40

Amorti+ation on *atent A& -0!4-!001 ; 4!3!002:

,*3&-> ! 2 years) ,1!-) * -&B-49oo# value of *atent A to 4!3!002:

"ost *3&->

Amorti+ation recogni+ed *&3->

-&B-4 1&24*&//0

Amorti+ation for 002 and 00/:*atent 9: ,*4/&2/!- years) * 4&0-

The cost basis of patent 9 is *4/&2/ 6 *-&2-- J *B&B00 6 *4&21/). 002& a full

year's amorti+ation is ta#en by dividing the unamorti+ed cost by the remaining

useful life. 7n 00/ this is *4>&>>>!-0 G years or *4&B0>.

Reuirement !#"

The legal costs of a court defense should be charged to expense whether the suit iswon or lost because it does not meet the recognition criteria. Also& the

unsuccessful defense implies that *atent A is of no further value to the company

and leads to the write6off of the remaining unamorti+ed cost of that patent.


8/26


12-10. Balagtas nterprises

Reuirement !a"

Patent

-. 9alance before adjustment& -!4-!0/ *220&000

"orrection: $educt unamorti+ed balance of *32&000

expenditures incorrectly debited to account on -!-!04:

*32&000 x ,3 years!-0 years) ,2&200) ACE ,-)K"orrected balance before 00/ amorti+ation *1>3&200

. 00/ Amorti+ation

*atent having two years remaining lifeLnamorti+ed cost: *-0&000 x ,3 years!-1 years)

? *-02&000

Amorti+ation: *-02&000! * 2&200

emaining *atentsLnamorti+ed cost: *1>3&200 6 *-02&000 ? *4>&200

Amorti+ation: *4>&200!3 2/&03-

*-0B&23- ACE ,)K

F!an"#$e A%!ee&ent

-. 9alance before adjustment& -!4-!0/ * >2&000

"orrection: $educt periodic payment charged to account ,12&000) ACE ,4)K

"orrected balance before 00/ amorti+ation * 20&000

. 00/ Amorti+ation:*20&000 ! 2 years * -0&000 ACE ,1)K

O!%an$'at$(n )(t

-. 9alance before adjustment& -!4-!0/ *-0&000"orrection: Degal fees incorrectly charged to

oodwill account in ->>B *12&000 ACE ,2)K

Amorti+ation of above costs&

->>B 6 001 ,*12&000 ! 10) ,3 years) 3&B32 43&-2 ACE ,/)K*-4>&-2 ACE ,3)K

. Ho amorti+ation need be ta#en up in 00/. Mith the effectivity of *A= 4B

which does not allow deferment or capitali+ation of organi+ation costs& theentire balance of this account& should have been charged off against income in

001. Adjusting entry in 00/ will be:

etained earnings ; *rior period


9/26


adjustment -4>&-2

5rgani+ation costs -4>&-2

G((*+$,,

-. 9alance before adjustment& -!4-!0/ *412&000

"orrection: eclassification of legal fees

to 5rgani+ation "osts , 12&000)

eclassification of advertising fee to Advertising Expense ,-00&000)Amorti+ation on oodwill for 001

,*00&000 ! 10 years) , 2&000)

9alance -.4-.01 *->2&000

. Effective Canuary 002& evised *A= 4/ prohibits amorti+ation of intangibles

with indefinite life 6 oodwill being one of them. (ence& no amorti+ation

would be ta#en up starting 002. Assessment for possible impairment shouldbe done annually or whenever there is an indication that the asset may beimpaired.

!"#usting $ournal ntries%

Patents

ACE ,-) etained Earnings 2&200

*atents 2&200

ACE ,) "ost of oods =old -0B&23-*atents -0B&23-

rancise AgreementACE ,4) =elling and Administrative 6

8ranchise Expense 12&0008ranchise Agreement 12&000

ACE ,1) =elling and Administrative Expense -0&000

8ranchise Agreement -0&000

7rgani8ation /ost

ACE ,2) 5rgani+ation "osts 12&000oodwill 12&000

ACE ,/) etained Earnings 3&B32

5rgani+ation "osts 3&B32

ACE ,3) etained Earnings -4>&-2


10/26


5rgani+ation "osts -4>&-2

Goodwill

ACE ,B) =elling and Administrative ; Advertising Expense -00&000

oodwill -00&000

ACE ,>) etained Earnings 2&000oodwill 2&000

Reuirement !#"

,-) etained Earnings 01&200

=elling and Administrative ; 8ranchise Expense 12&000

=elling and Administrative ;Advertising Expense -00&000

5rgani+ation "osts -0&000

8ranchise Agreement 12&000

oodwill -20&000*atents 2&200

Summary:

etained Earnings !9r)" /r)

ACE ,-) ,2&200)

,3) ,-4>&-2),>) 2&000,/) 3&B32

,01&200)

5rgani+ation "osts 9r) !/r)"ACE ,2) 12&000

,/) ,3&B32)

,3) ,-4>&-2)

,-0&000)

oodwill 9r) !/r)"

ACE ,2) 12&000

,B) -00&000,>) 2&000

-20&000

,) "ost of oods =old -0B&23-


11/26


=elling and Administrative Expense -0&000

*atents -0B&23-8ranchise Agreement -0&000

12-11. Balagtas Company

Reuirement !a"

The deficiencies listed below are apparent from the balance sheet and theexplanations given. The assumption is made that costs incurred have been

properly classified by %r. 9alagtas. The correct treatment of each item is

presented in the column on the right.

9e(iciency /orrect Treatment

-. "apitali+ation of expenses:

esearch and development%ar#eting research

*ersonnel recruitment and trainingDegal fees relative to organi+ation

of the corporation

5perating expenses

Treat all the items as expenses in

00/ income statement.

. Ho depreciation was ta#en onmachinery.

Expense appropriate amounts in the00/ income statement.

4. 5rdinary shares account does not

reflect the par value of the

outstanding shares ,--&000).

7ncrease ordinary shares by par

value of -&000 shares.

1. Ho statement of shareholders'

equity and explanation of sharesissued is presented.

The statement should be provided&

including dates and numbers ofshares issued& peso amounts

assigned& and the bases for

assigning peso values in noncash

transactions. Also& land given by%ario should be recorded at fair

valueN services by *edro should be

recogni+ed as an expense at fair

value. Additional paid6in capitalmay be recogni+ed as the result of

the above.

2. Ho accumulated deficit presented. O$eficit accumulated duringdevelopment stageP should be

included in the shareholders' equitysection. The amount results from

corrections made in items - and


12/26


above.

Reuirement !#"

Additional items which should be included are:

-. +ncome statement, including amounts of revenue and expenses recogni+ed

since the inception of the enterprise in 00/.

. Statement o( cas (lows,including cumulative amounts of sources and uses ofcash since the inception of the enterprise.

4. Additional disclosures1 identification of the company as a development6stage

enterprise& and description of significant development6stage activities.

12-12. &i''o Corporation

Reuirement !a"

7n a purchase transaction& assets are recorded at their acquisition price& which

becomes the cost basis to the acquiring corporation. The boo# values of the assets

for ain "ompany are irrelevant.

Reuirement !#"

Mhen a price is paid for a group of assets& the total price must be allocated to theindividual assets. 9ecause we #now neither the total fair value of the tangible and

other intangible assets acquired from ain "ompany nor the price to be paid bythe Hi##o "orporation& we cannot determine whether Hi##o "orporation has any

goodwill to record. The total price to be paid by the Hi##o "orporation isindefinite but it may be estimated by discounting the expected receipts ,-< of net

sales) at the end of each of the next 2 years and adding the initial *120&000 cash

payment. 7f the estimated purchase price exceeds the sum of the estimated fairvalues of the tangible and other assets purchased& then the excess may be recorded

as goodwill.

12-13. (ol"en Springs Shopping Center, Inc.

7nterest on mortgage bonds: An amount equal to the interest cost incurred in 001

,*/0&000) is clearly a cost that can be associated with the normal construction

period and can be regarded as a normal element of the capitali+ed cost of thephysical assets of the shopping center because the construction period would have

ended at the end of the year if the typhoon had not occurred. The decision to use

debt capital to finance the shopping center was made with full #nowledge that

interest would accrue during the construction period and add to the total cost of


13/26


building the center and bringing it to the point at which it would produce revenue.

The future income to be generated by the shopping center must have beenestimated to be more than sufficient to recover all of the expected costs of

building the center and preparing it for occupancy& including interest during theconstruction period.

7nstead of treating interest during construction as an element of the cost of the

physical assets& it can be argued that it represents an element of the general cost ofbringing the business to the point of revenue production and should therefore be

treated as an organi+ation cost. This view regards interest during construction as

just another of the many expenditures that are necessary to acquire and organi+e

the physical assets of a new business but do not attach to any specific assets.Treated as an organi+ation cost& interest during construction would be expensed as

a start6up cost.

Another alternative to capitali+ing an amount equal to the 001 interest cost is totreat it as interest expense. This treatment is inappropriate because it assumes that

the decision to use debt capital to finance construction is a decision deliberately to

incur an expense for the interest that accrues during the expected construction

period.

The extension of the construction period to 5ctober 002 because of the typhoon

was externally imposed and so the interest capitali+ation period continues until

final construction is complete. That is& the additional interest cost is capitali+edand not expensed as a loss from the typhoon.

"ost of obtaining tenants: 9oth the 001 and 002 costs of obtaining tenants

should be capitali+ed and amorti+ed over the life of the leases. The fact that all of

the tenants who were signed when the typhoon occurred accepted the 5ctoberoccupancy date indicates that the total cost of obtaining tenants was not affected

by the delay.

The cost of obtaining tenants has a direct and easily identifiable relationship to the

rental income to be earned over the terms of the leases. Lnder these

circumstances& the problem of reliably measuring periodic net income is best

solved by matching costs with the revenues to which they are directly related.

*romotional advertising: The 001 cost of promotional advertising should be

written off as a start6up cost. The 002 cost of promotional advertising should

also be expensed.

The initial expense treatment of the 001 advertising cost is appropriate because itis a start6up cost.

The 002 advertising cost may also be considered as a start6up cost or simply

expensed as advertising cost incurred.


14/26



15/26


12-14. )ee Manufacturing Corporation

Lee Manufacturing CorporationFinancial Statement Worksheet

For the Year Ended December 31 !""#

Trial Balance Adjustments Income Statement Balance Sheet

General Ledger Accounts Debit Credit Debit Credit Debit Credit Debit Credit

Cas- P #1000 P #1000Accounts recei.a,le 92500 $8% P 2500 95000Allo/ance or dou,tul accounts P 500 $500%*n.entories "8500 "8500ac-iner 75000 $1% 17000 920003+uipment 29000 $8% 8500 "7500Accumulated depreciation 10000 $10000%Patents 85000 $1% P 17000 #8000'ease-old impro.ements 2#000 $8% 11000 15000Prepaid epenses 10500 10500r6anization costs 29000 $9% 29000ood/ill 24000 $7% 24000'icensin6 a6reement no! 1 50000 $4% 1250 19500

$5% 29250'icensin6 a6reement no! 2 49000 $"% 1000 50000Accounts paa,le 147500 P 147500nearned re.enue 12500 $"% 1000 1"500Capital stoc "00000 "00000Retained earnin6s :an! 1 200# 27000 $27000%;ales 7#8500 P 7#8500Cost o 6oods sold 454000 $2% "400 P 4#4400

$#% 5500$10% 1500

;ellin6 and 6eneral epenses 17"000 $7% 8000 181000;tart


16/26


12-14. )ee Manufacturing Corporation *continue" . . . +

Adusting entries !sown on workseet"1

,-) %achinery -3&000

*atents -3&000

To transfer cost of improving

machinery to the fixed asset account.

,) "ost of oods =old 4&100

Accumulated Amorti+ation: *atents 4&100

To record 00/ patent amorti+ation,-!0 x */B&000).

,4) Dicensing Agreement Ho. -&000Lnearned evenue -&000To classify revenue received in advance

on licensing agreement as unearned

revenue.

,1) *rior *eriod Adjustment ; Dicensing Agreement

Ho. - -&20

Dicensing Agreement Ho. - -&20

To ta#e up 002 amorti+ation ,10 yearlife). ,Hote -)

.ote &: Lnder the revised *A= 4B made

effective Canuary -& 002& intangible assets with

indefinite useful lives need not be amorti+ed butperiodically assessed for possible impairment.

This problem may also be solved by

disregarding the 106year amorti+ation period forDicensing Agreement Q-. The flood that

rendered Dicensing Agreement Q- worthless in

Canuary 003 should be fully disclosed in the

$ecember 4-& 00/ statements.

,2) *rior *eriod Adjustment ; Dicensing Agreement

Ho. - >&20

Dicensing Agreement Ho. - >&20To write off the permanent /0&000

To expense other organi+ation costs.

,>) Equipment B&200Accounts eceivable ; Dessor &200

Deasehold 7mprovements --&000

To charge the Equipment account with

movable equipment and to record areceivable from the landlord for the real

estate taxes erroneously paid by Dee.

,-0) "ost of oods =old -&200*rior *eriod Adjustment ; Amorti+ation of

Deasehold 7mprovements -&200

Accumulated Amorti+ation: Deasehold

7mprovements 4&000To record 002 and 00/ amorti+ation

of leasehold improvements based on

-06year life of lease , x -0< x

*-2&000).


18/26


12-15. Broa"way Corporation

Reuirement !&"

9roadway "orporation

7ntangibles =ection of 9alance =heet

$ecember 4-& 00/

8ranchise from 7E "opy =ervice& 7nc.& net of

accumulated amorti+ation of */&B30 ,=chedule -) * /-&B40

*atent& net of accumulated amorti+ation of *&020

,=chedule ) -1&420Trademar#& net of accumulated amorti+ation of

*3&>1 ,=chedule 4) 1&30/

Total intangibles *--B&BB/

Scedule &1

"omputation of 8ranchise from7E "opy =ervice& 7nc.

"ost of franchise at Canuary -& 00/

$own payment *2&000*resent value of installments 14&300

7nitial amount capitali+ed */B&300

Amorti+ation of franchise for 00/ ,*/B&300 -0

years) ,/&B30)

8ranchise balance& $ecember 4-& 00/ */-&B40

Scedule 21

"omputation of *atent

"apitali+ed cost of patent at Canuary & 00/ ; legalfees and other costs associated with registration *-/&100

Amorti+ation of patent for 00/ ,*-/&100 B years) ,&020)

*atent balance& $ecember 4-& 00/ *-1&420


19/26


Scedule :1

"omputation of Trademar#

/ost

Accumulate

d

Amorti8atio

n"ost of trademar# at Culy -& 004 *10&000

Amorti+ation through $ecember 4-& 00/

,*10&000 0 years ? *&000 x 4 G years) *3&000

9alance& $ecember 4-& 00/ *10&000 *3&000

$educt accumulated amorti+ation ,3&000)

Trademar# balance& $ecember 4-& 00/ *44&000

"ost of successful litigation in defense of trademar# should be charged to expense.

Reuirement !2"

9roadway "orporationExpenses esulting from 7ntangibles Transactions

8or the Rear Ended $ecember 4-& 00/

8ranchise from 7E "opy =ervice& 7nc.

Amorti+ation of franchise ,=chedule -) * /&B30

8ranchise fee on revenues from operations

,*>00&000 x 2&/00.


20/26


Degal fees in successfully defending the trade name should be charged toexpense.

,c) "arrying amount ,*->&344) S 8air Ialue ,*-2&000)N thus the tradename failsthe recoverability test. The new carrying value is *-2&000.

The fair value is considered the recoverable amount. The estimated total

future flows from the trade name of *-/&000 need to be discounted and theresulting present value would in most probability be a lower amount than

*-2&000.

00B amorti+ation ,after recording impairment loss):*-2&000 B ? *-&B32.

-!4-!0B boo# value: *-2&000 ; *-&B32 ? *-4&-2

12-17. Miguel !lfonso Corporation

Reuirement !a"

Attorney's fees in connection with organi+ation of the corporation *-2&000

"osts of meetings of incorporators to discuss

organi+ational activities 3&000

=tate filing fees to incorporate -&000Total organi+ation costs *4&000

$rafting and design equipment& *-0&000& should be classified as part of fixed

assets& rather than as organi+ation costs.

Reuirement !#"

5rgani+ation Expense............................................................................................................4&000

"ash ,*ayables).......................................................................................................4&000

12-18. $o -an Company

Reuirement !a"

Co Tan "ompany

7HTAH79DE= =E"T75H 58 9ADAH"E =(EET$ecember 4-& 003

*atent from 8rancis Argante "ompany& net of accumulated

amorti+ation of *2/0&000 ,=chedule -) *-&110&0008ranchise from C" "ompany& net of accumulated

amorti+ation of *1B&000 ,=chedule )

14&000

Total intangibles *-&B3&000


21/26


=chedule - "omputation of *atent from 8rancis Argante "ompany

"ost of patent at date of purchase *&000&000

Amorti+ation of patent for 00/ ,*&000&000 -0 years) ,00&000)

-&B00&000

Amorti+ation of patent for 003 ,*-&B00&000 2 years) ,4/0&000)

*atent balance *-&110&000

=chedule "omputation of 8ranchise from C" "ompany

"ost of franchise at date of purchase * 1B0&000

Amorti+ation of franchise for 001 ,*1B0&000 -0) ,1B&000)

8ranchise balance * 14&000

Reuirement !#"

Co Tan "ompany

7ncome =tatement Effect

8or the year ended $ecember 4-& 003

*atent from 8rancis Argante "ompany:

Amorti+ation of patent for 003

,*-&B00&000 2 years) *4/0&000

8ranchise from C" "ompany:

Amorti+ation of franchise for 003

,*1B0&000 -0) * 1B&000

*ayment to eagan "ompany ,*&200&000 U 2//&000

12-19. -win'le In"ustries

Reuirement !a"

*atent U

Dife in years -3

Dife in months ,- U -3) 01Amorti+ation per month *-20

Humber of months amorti+ed to date

Rear %onth

001 -0

002 -


22/26


00/ -

003 -1/

9oo# value -!4-!03 *4&300: ,*40&/00 ; 1/ U *-20K)*atent R

Dife in years -0

Dife in months ,- U -0) -0Amorti+ation per month *-2


Rear %onth

002 /00/ -

003 -

40

9oo# value -!4-!03 *--&20: ,*-2&000 ; *-2 U 40K)

*atent V

Dife in years 1Dife in months ,- U 1) 1B

Amorti+ation per month *400


Rear %onth

00/ 1003 -

-/

9oo# value -!4-!03 *>&/00: ,*-1&100 ; *400 U -/K)

At $ecember 4-& 003

*atent U *4&300*atent R --&20

*atent V >&/00

Total *11&220

Reuirement !#"

Analysis of 00B transactions

-. The *12&300 incurred for research and development should be

expensed.


23/26


. The boo# value of *atent R is *--&20 and its estimated future cash flows

are */&000: ,4 U *&000) therefore *atent R is impaired. The impairmentloss is imputed as follows:

9oo# value *--&20

Dess: *resent value of future

cash flows &000 U .233-0 2&-21

Doss recogni+ed * /&0>/*atent R carrying amount ,-!4-!0B) *2&-21

At $ecember 4-& 00B

*atent U *-&>00 ,*4&300 ; - U *-20K)

*atent R 2&-/1 ,*resent value of future cash flows)

*atent V /&000 ,*>&/00 ; - U *400K)*atent AA 41&2/0 ,*4/&1B0 ; *-&>0)Total */3&/1

*atent AA amorti+ation

Dife in years > -!

Dife in months --1Amorti+ation per month *40

*40 U / ? *-&>0

*atent R: Ialue in Lse

&000 x 0.>2> ? *-&B2&000 x 0.B234 ? -&3-2

&000 x 0.3>B4 ? -&2>3*2&-/1

or

&000 x .2B ? *2&-/1

12-20. Depp Corporation

Reuirement !a"

"ash.............................................................................................................20&000

eceivables..................................................................................................>0&000

7nventory......................................................................................................-2&000

Dand............................................................................................................./0&0009uildings......................................................................................................32&000

Equipment....................................................................................................30&000

Trademar#s..................................................................................................-2&000oodwill....................................................................................................../2&000


24/26


Accounts *ayable............................................................................ 00&000

Hotes *ayable.................................................................................. -00&000"ash................................................................................................. 20&000

Hote that the building and equipment would be recorded at the 3!-!0/ cost to

9righamN accumulated depreciation accounts would not be recorded.

Reuirement !#"

-. Amorti+ation Expense ,Trademar#s)................................................................................-&200

Trademar#s ,*-2&000 ; *4&000K -!1 U /!-).........................................................-&200

. oodwill will not be amorti+ed.

12-21. Bill Santos Company

Reuirement !a"

$ecember 4-& 00/

Doss on 7mpairment.......................................................................................-&-00&000"opyrights.......................................................................................-&-00&000

"arrying amount *1&400&000

8air value 4&00&000 Doss on impairment *-&-00&000

Reuirement !#"

"opyright Amorti+ation Expense...................................................................40&000

"opyrights........................................................................................40&000

Hew carrying amount *4&00&000

Lseful life -0 years

Amorti+ation per year * 40&000

;istorical /ost air 3alue

air 3alue

&2):&)0'

"I -.4-.0/ *1&400&000 *4&00&000Amorti+ation& 003 140&000 40&000

"I -.4-.03 *4&B30&000 *&BB0&000 *4&100&000

Reuirement !c"

ecovery 20&000


25/26


"opyrights......................................................................................................20&000"opyright Amorti+ation Expense

or ain on ecovery of *reviously ecogni+ed 7mpairment............................................................... .20&000

12-22. spaol Co.

8ranchises....................................................................................................................1&000

*repaid ent.......................................................................................................................B&000etained Earnings ,5rgani+ation "osts of */&000 in

00/)............................................................................................................................../&000

etained Earnings ,*-/&000 ; */&000)..............................................................................-0&000*atents................................................................................................................................31&000Degal fees...........................................................................................................................-&/20

esearch and $evelopment Expense..................................................................................

,*32&000 J *-/0&000)......................................................................................................42&000

oodwill.............................................................................................................................3B&1007ntangible Assets................................................................................................../B/&020

8ranchise Amorti+ation Expense ,*1&000 B).................................................................2&20

etained Earnings ,*1&000 B U /!-)............................................................................&/2

8ranchises.............................................................................................................3&B32

ent Expense ,*B&000 )...............................................................................................-1&000

etained Earnings ,*B&000 U 4!-)............................................................................4&200*repaid ent.........................................................................................................-3&200

*atent Amorti+ation Expense.............................................................................................3&100

*atents..................................................................................................................3&100

,*31&000 -0)

HoteWHo amorti+ation of goodwillN goodwill should be tested for impairment on

at least an annual basis in future periods.

12-23. Sim )a/oratories

Reuirement !a"

"osts to obtain patent Can. ->>> */&020

->>/ amorti+ation ,*/&020 -3) ,4&/20)

"arrying value& -!4-!>> *2B&100


26/26


All costs incurred prior to Canuary ->>> are related to research and development

activities and were expensed as incurred.

Reuirement !#"

-!-!00 carrying value of patent *2B&100

000 amorti+ation ,*/&020 -3) *4&/20

00- amorti+ation 4&/20 ,3&400)

2-&-00Degal fees to defend patent -!0- 42&300

"arrying value& -!4-!0- B/&B00

00 amorti+ation ,*B/&B00 -1) /&00

004 amorti+ation /&00 ,-&100)"arrying value& -!4-!04 *31&100

The costs incurred in 000 and 00 are related to research and development

activities and are expensed as incurred. Degal fees in successful defense of thepatent in 00- could be capitali+ed and considered AA*.

Reuirement !c"

-!-!01 carrying value *31&100

001 amorti+ation ,*31&100 2) *-1&BB0

002 amorti+ation -1&BB000/ amorti+ation -1&BB0 ,11&/10)

"arrying value& -!4-!0/ *>&3/0

The legal costs in 00/ were expensed because the suit was unsuccessful. Even ifthe lawsuit was successful& the legal fees would be li#ewise charged to expense.

This is in accordance with *A= 4B&+ntangi#les which was made effective in 001.

chapter12 - answer

Documents