EXERCISE 12-5
|
Research and
Development Expense...................................... |
940,000 |
|
|
Patents........................................................................................ |
75,000 |
|
|
Rent Expense
[(5 ¸
7) X $91,000]............................................. |
65,000 |
|
|
Prepaid Rent
[(2 ¸
7) X $91,000]............................................... |
26,000 |
|
|
Advertising
Expense................................................................. |
207,000 |
|
|
Income
Summary........................................................................ |
241,000 |
|
|
Discount on
Bonds Payable..................................................... |
82,950* |
|
|
Interest
Expense........................................................................ |
1,050 |
|
|
Paid in Capital in Excess of Par on Common Stock...................................................... |
|
250,000 |
|
Intangible Assets............................................................ |
|
1,388,000 |
*84,000
¸
240 months = $350; $350 X 3 = $1,050; $84,000 – $1,050 = $82,950
|
Patent
Amortization Expense [($75,000 ¸ 10) X 1/2]....................... |
3,750 |
|
|
Patents (or Accumulated
Amortization) |
|
3,750 |
EXERCISE
12-6
|
Patents........................................................................................ |
350,000 |
|
|
Goodwill...................................................................................... |
360,000 |
|
|
Franchise.................................................................................... |
450,000 |
|
|
Copyright..................................................................................... |
156,000 |
|
|
Research and
Development Expense.................................... |
215,000 |
|
|
Intangible Assets............................................................ |
|
1,531,000 |
|
|
|
|
|
Amortization
Expense............................................................... |
79,250 |
|
|
Patents ($350,000/8)....................................................... |
|
43,750 |
|
Franchise ($450,000/10 X 6/12)..................................... |
|
22,500 |
|
Copyright ($156,000/5 X 5/12)........................................ |
|
13,000 |
Balance
of Intangible Assets as of December 31, 2004
Patents = $350,000 – $43,750 = $306,250
Goodwill = $360,000 (no amortization)
Franchise = $450,000 – $22,500 = $427,500
Copyright = $156,000 – $13,000 = $143,000
EXERCISE 12-8
|
(a) |
Attorney’s
fees in connection with organization |
|
|
|
|
of the corporation |
|
$15,000 |
|
|
Costs of
meetings of incorporators to discuss |
|
|
|
|
organizational activities |
|
7,000 |
|
|
State filing
fees to incorporate |
|
1,000 |
|
|
Total
organization costs |
|
$23,000 |
Drafting and
design equipment, $10,000, should be classified as part of fixed assets, rather
than as organization costs.
|
(b) |
Organization
Expense.............................................................. |
23,000 |
|
|
|
Cash (Payables)............................................................. |
|
23,000 |
EXERCISE 12-13
|
(a) |
Cash ....................................................................................... |
50,000 |
|
|
|
Receivables............................................................................. |
90,000 |
|
|
|
Inventory.................................................................................. |
125,000 |
|
|
|
Land ....................................................................................... |
60,000 |
|
|
|
Buildings.................................................................................. |
75,000 |
|
|
|
Equipment................................................................................ |
70,000 |
|
|
|
Trademarks.............................................................................. |
15,000 |
|
|
|
Goodwill................................................................................... |
65,000 |
|
|
|
Accounts Payable........................................................ |
|
200,000 |
|
|
Notes Payable............................................................. |
|
100,000 |
|
|
Cash.............................................................................. |
|
250,000 |
Note that
the building and equipment would be recorded at the 7/1/03 cost to Brigham;
accumulated depreciation accounts would not be recorded.
|
(b) |
Amortization
Expense (Trademarks)........................................... |
1,500 |
|
|
|
Trademarks ([$15,000 – $3,000] 1/4
X 6/12)...................... |
|
1,500 |
EXERCISE 12-15
|
(a) |
December 31,
2004 |
||
|
|
Loss on
Impairment................................................ |
15,000,000 |
|
|
|
Goodwill....................................................... |
|
15,000,000 |
The fair value
of the reporting unit is below its carrying value. Therefore, an impairment has
occurred. To determine the impairment amount, we first find the implied
goodwill. We then compare this implied fair value to the carrying value of the
goodwill to determine the amount of the impairment to record.
|
Fair value
of division |
$335,000,000 |
|
Carrying
amount of division, net of Goodwill |
150,000,000 |
|
Implied
value of Goodwill |
185,000,000 |
|
Carrying
value of Goodwill |
(200,000,000) |
|
Loss on
Impairment |
$
15,000,000 |
(b) No entry
necessary. After a goodwill impairment loss is recognized, the adjusted
carrying amount of the goodwill is its new accounting basis. Subsequent
reversal of previously recognized impairment losses is not permitted under SFAS
No. 142.
EXERCISE 12-16
(a)
In accordance
with FASB Statement No. 2, the $325,000 is a research and development cost that
should be charged to R & D Expense and, if not separately disclosed in the
income statement, the total cost of R & D should be separately disclosed in the notes to the
financial statements.
|
(b) |
Research and
Development Expense........................... |
110,000 |
|
|
|
Cash, Accts. Payable, etc..................................... |
|
110,000 |
|
|
(To record research and |
|
|
|
|
development costs) |
|
|
|
|
|
|
|
|
|
Patents............................................................................... |
16,000 |
|
|
|
Cash, Accts. Payable, etc..................................... |
|
16,000 |
|
|
(To record legal and administrative |
|
|
|
|
costs incurred to obtain patent |
|
|
|
|
#472-1001-84) |
|
|
|
|
|
|
|
|
|
Patent
Amortization Expense.......................................... |
3,200 |
|
|
|
Patents................................................................... |
|
3,200 |
|
|
[To record one year’s amortization |
|
|
|
|
expense ($16,000 ¸ 5 = $3,200)] |
|
|
|
(c) |
Patents.................................................................................... |
47,200 |
|
|
|
Cash, Accts. Payable, etc......................................... |
|
47,200 |
|
|
(To record legal cost of successfully |
|
|
|
|
defending patent) |
|
|
The cost of
defending the patent is capitalized because the defense was successful and
because it extended the useful life of the patent.
|
|
Patent
Amortization Expense.............................................. |
7,500 |
|
|||
|
|
Patents........................................................................ |
|
7,500 |
|||
|
|
(To record one year’s amortization |
|
|
|||
|
|
Expense: |
|
|
|||
|
$16,000 –
$3,200 = $12,800; |
|
|
|||
|
$12,800 ¸ 8 = |
$1,600 |
|
|||
|
$47,200 ¸ 8 = |
5,900 |
|
|||
|
Amortization
expense for 2005 |
$7,500 |
|
|||
(d) Additional
engineering and consulting costs required to advance the design of a product to
the manufacturing stage are R & D costs. As indicated in the chapter it is
R &D because it translates knowledge into a plan or design for a new
product.
*EXERCISE 12-18 (10-15 minutes)
(a)
Companies are
required to use the greater of (1) the ratio of current revenues to current
plus anticipated revenues (percent of revenue approach) or (b) the
straight-line method over the remaining useful life of the asset to amortize
capitalized computer software costs.
|
(b) |
Percent of
revenue approach: |
$2,000,000 |
X $3,600,000
= $600,000 |
|
$12,000,000 |
Straight-line method: 1/5 X
$3,600,000 = $720,000
Amortization
for 2003 would be $720,000 by the straight-line method because it results in
the greater amount.
|
|
PROBLEM 12-1 |
|
|
Franchises........................................................................................... |
42,000 |
|
|
Prepaid Rent........................................................................................ |
28,000 |
|
|
Retained
Earnings (Organization Costs of
$6,000 in 2002).. |
6,000 |
|
|
Retained
Earnings ($16,000 – $6,000)............................................... |
10,000 |
|
|
Patents
($74,000 + $12,650)................................................................ |
86,650 |
|
|
Research and
Development Expense............................................. |
|
|
|
($75,000 + $160,000)......................................................................... |
235,000 |
|
|
Goodwill............................................................................................... |
278,400 |
|
|
Intangible Assets..................................................................... |
|
686,050 |
|
|
|
|
|
Franchise
Amortization Expense ($42,000 ¸ 8)............................... |
5,250 |
|
|
Retained
Earnings ($42,000 ¸ 8 X 6/12)............................................ |
2,625 |
|
|
Franchises............................................................................... |
|
7,875 |
|
|
|
|
|
Rent Expense
($28,000 ¸ 2)............................................................... |
14,000 |
|
|
Retained
Earnings ($28,000 ¸ 2 X 3/12)............................................ |
3,500 |
|
|
Prepaid Rent............................................................................ |
|
17,500 |
|
|
|
|
|
Patent
Amortization Expense............................................................ |
8,170 |
|
|
Patents..................................................................................... |
|
8,170 |
|
($74,000 ¸ 10) + ($12,650 X 7/115) |
|
|
Note—No amortization of goodwill;
goodwill should be tested for impair-ment on at least an annual basis in future
periods.
|
|
PROBLEM 12-3 |
|
|
(a) |
Haerhpin
Corporation |
|
|
Intangible Assets |
||
|
December 31,
2004 |
||
|
Franchise, net of accumulated
amortization of $5,870 |
|
|
|
(Schedule 1) |
$52,830 |
|
|
Patent,
net of accumulated amortization of $1,700 |
|
|
|
(Schedule 2) |
11,900 |
|
|
Trademark,
net of accumulated amortization of $5,840 |
|
|
|
(Schedule 3) |
34,320 |
|
|
Total
intangible assets |
$99,050 |
|
|
|
|
|
|
Schedule
1 Franchise |
|
|
|
Cost
of franchise on 1/1/04 ($15,000 + $43,700) |
$58,700 |
|
|
2004
amortization ($58,700 X 1/10) |
(5,870) |
|
|
Cost
of franchise, net of amortization |
$52,830 |
|
|
|
|
|
|
Schedule
2 Patent |
|
|
|
Cost
of securing patent on 1/2/04 |
$13,600 |
|
|
2004
amortization ($13,600 X 1/8) |
(1,700) |
|
|
Cost
of patent, net of amortization |
$11,900 |
|
|
|
|
|
|
Schedule
3 Trademark |
|
|
|
Cost
of trademark on 7/1/01 |
$32,000 |
|
|
Amortization,
7/1/01 to 7/1/04 ($32,000 X 3/20) |
(4,800) |
|
|
Book
value on 7/1/04 |
27,200 |
|
|
Cost
of successful legal defense on 7/1/04 |
8,160 |
|
|
Book
value after legal defense |
35,360 |
|
|
Amortization,
7/1/04 to 12/31/04 ($35,360 X 1/17 X 6/12) |
(1,040) |
|
|
Cost
of trademark, net of amortization |
$34,320 |
|
|
(b) |
Haerhpin
Corporation |
|
|
Expenses Resulting from Selected
Intangible Assets Transactions |
||
|
For the Year
Ended December 31, 2004 |
||
|
Interest expense ($43,700 X 14%) |
$ 6,118 |
|
|
Franchise
amortization (Schedule 1) |
5,870 |
|
|
Franchise
fee ($950,000 X 5%) |
47,500 |
|
|
Patent
amortization (Schedule 2) |
1,700 |
|
|
Trademark
amortization (Schedule 4) |
1,840 |
|
|
Total
intangible assets |
$63,028 |
|
Note: The $65,000 of research and development costs incurred
in developing the patent would have been expensed per FASB No. 2 prior to 2004.
|
Schedule
4 Trademark Amortization |
|
|
Amortization,
1/1/04 to 6/30/04 ($32,000 X 1/20 X 6/12) |
$ 800 |
|
Amortization,
7/1/04 to 12/31/04 ($35,360 X 1/17 X 6/12) |
1,040 |
|
Total
trademark amortization |
$1,840 |
|
|
PROBLEM 12-4 |
|
(a)
Income
statement items and amounts for the year ended December 31, 2003:
|
Research and
development expenses* |
$286,000 |
|
Amortization
of patent ($80,000 ¸ 10 years) |
8,000 |
*The
research and development could be listed by the components rather than in one
total. The detail of the research and development expenses are as follows:
|
Depreciation—building |
$
14,000 |
|
($280,000 ¸ 20 years) |
|
|
Salaries and
employee benefits |
195,000 |
|
Other
expenses |
77,000 |
(b)
Balance sheet
items and amounts as of December 31, 2003:
|
Land |
$
60,000 |
|
Building
(net of accumulated depreciation of $14,000) |
266,000 |
|
Patent (net
of amortization of $14,000)* |
66,000 |
|
|
|
|
*([$80,000 ¸ 10] X 3/4)
+ ($80,000 ¸ 10) |
|
All
research and development costs should be charged to expense when incurred (see
Statement of Financial Accounting Standard No. 2, “Accounting for Research and
Development Costs”). Therefore, all of Florence Nightingale Tool Company’s
costs related to its research and development activities for 2003 would be
expensed regardless of the long-term benefits.
The patent
was acquired for manufacturing rights rather than for use in research and
development activities. Consequently, the cost of the patent can be capitalized
as an intangible asset and amortized over its useful life.