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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.