homework due 021513 JAIN

Larry Byrd, Inc., spent $

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1

11

,320 in attorney fees while developing the trade name of its new product, the Mean Bean Machine.
Prepare the journal entries to 1

)

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record the $111,320 expenditure and 2) the first year’s amortization, using an 11-year life.
(Credit account titles are automatically indented when amount is entered. Do not indent manually.)

1.

No.

Account Titles and Explanation

Debit

Credit

2.

2. Amortization Expense

=

($111,320 x 1/11) = $10,

12

0

On September 1, 2012, Winans Corporation acquired Aumont Enterprises for a cash payment of

$717,130

. At the time of purchase, Aumont’s balance sheet showed assets of $

6

07,070, liabilities of $

206,980

, and owners’ equity of $400,090. The fair value of Aumont’s assets is estimated to be

$813,000

.
Compute the amount of goodwill acquired by Winans.

Value assigned to goodwill

Value assigned to goodwill

$

Purchase price

$717,130

Fair value of assets

$813,000

Fair value of liabilities

206,980

Fair value of net assets

606,020

$111,110

Nieland Industries had one patent recorded on its books as of January 1, 20

12.

This patent had a book value of

$342,360

and a remaining useful life of 9

years

. During 2012, Nieland incurred research and development costs of $116,430 and brought a patent infringement suit against a competitor. On December 1, 2012, 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 $

110,580

to defend this patent. At what amount should patent(s) be reported on the December 31, 2012, balance sheet, assuming monthly amortization of patents?

$

The amount to be reported

Carrying
Amount

Life in
Months

Amortization
Per Month

Months
Amortization

Patent (1/1/12)

$342,360

108

$3,170

12

Legal costs (12/1/12)

110,580

97

$1,140

1

$452,940

$452,940

)

Carrying amount

Less:

Amortization of patent

(12 x $3,170)

(38,040

)

Legal costs amortization

(1 x $1,140)

(1,140

Carrying amount 12/31/12

$413,760

Presented below is a list of items that could be included in the intangible assets section of the balance sheet.
Indicate which items on the list below would generally be reported as intangible assets in the balance sheet.

2.

Reported as

1.

Investment in a subsidiary company.

Timberland.

3.

Cost of engineering activity required to advance the design of a product to the manufacturing stage.

4.

Lease prepayment (6 months’ rent paid in advance).

5.

Cost of equipment obtained.

6.

Cost of searching for applications of new research findings.

7.

Costs incurred in the formation of a corporation.

8.

Operating losses incurred in the start-up of a business.

9.

Training costs incurred in start-up of new operation.

10.

Purchase cost of a franchise.

11.

Goodwill generated internally.

12.

Cost of testing in search for product alternatives.

13.

Goodwill acquired in the purchase of a business.

14.

Cost of developing a patent.

15.

Cost of purchasing a patent from an inventor.

16.

Legal costs incurred in securing a patent.

17.

Unrecovered costs of a successful legal suit to protect the patent.

18.

Cost of conceptual formulation of possible product alternatives.

19.

Cost of purchasing a copyright.

20.

Research and development costs

.

21.

Long-term receivables.

22.

Cost of developing a trademark.

23.

Cost of purchasing a trademark.

Devon Harris Company has provided information on intangible assets as follows.
A patent was purchased from Bradtke Company for

$2,707,000

on January 1, 2011. Harris estimated the remaining useful life of the patent to be 10 years. The patent was carried in Bradtke’s accounting records at a net book value of $1,921,400 when Bradtke sold it to Harris.
During 2012, a franchise was purchased from Greene Company for

$548,200

. In addition, 5

%

of revenue from the franchise must be paid to Greene. Revenue from the franchise for 2012 was $2,394,000. Harris estimates the useful life of the franchise to be 10 years and takes a full year’s amortization in the year of purchase.
Harris incurred research and development costs in 2012 as follows.

Materials and equipment

$141,300

Personnel

191,700

Indirect costs

103,800

$

436,800

Harris estimates that these costs will be recouped by December 31, 2015. The materials and equipment purchased have no alternative uses.
On January 1, 2012, because of recent events in the field, Harris estimates that the remaining life of the patent purchased on January 1, 2011, is only 5 years from January 1, 2012.
(a) Prepare the intangibles section of harris’s balance sheet at December 31, 2012.

$

$

DEVON HARRIS COMPANY

Balance Sheet (Partial)
December 31, 2012

(b) Compute the income statement effect for the year ended December 31, 2012 as a result of the facts above.

Total charged against income

$

(a)

Schedule 1 Computation of Patent from Bradtke Company

Cost of patent at date of purchase

$2,707,000

Amortization of patent for 2011

=

($2,707,000 ÷ 10 years)

=

(270,700

)

2,436,300

Amortization of patent for 2012

=

($2,436,300 ÷ 5 years)

=

(487,260

)

Patent balance

$1,949,040

=

=

)

Schedule 2 Computation of Franchise from Greene Company

Cost of franchise at date of purchase

$548,200

Amortization of franchise for 2012

($548,200 ÷ 10)

(54,820

Franchise balance

$493,380

(b)

Total charged against income

DEVON HARRIS COMPANY
Income Statement Effect
For the Year Ended December 31, 2012

Patent from Bradtke Company:

Amortization of patent for 2012 ($2,436,300 ÷ 5 years)

$487,260

Franchise from Greene Company:

Amortization of franchise for 2012 ($548,200 ÷ 10)

$54,820

Payment to Greene Company ($2,394,000 x 5%)

119,700

174,520

Research and development costs 436,800

$1,098,580

Fred Graf, owner of Graf Interiors, is negotiating for the purchase of Terrell Galleries. The balance sheet of Terrell is given in an abbreviated form below.

$581,150

TERRELL GALLERIES
BALANCE SHEET
AS OF DECEMBER 31, 2012

Assets

Liabilities and Stockholders’ Equity

Cash

$100,490

Accounts payable

$49,700

Land

70,610

Notes payable (long term)

302,060

Buildings (net)

204,100

Total liabilities

351,760

Equipment (net)

176,030

Common stock

$235,500

Copyrights (net)

29,920

Retained earnings

-6,110

229,390

Total assets

$581,150

Total liabilities and stockholders’ equity

Graf and Terrell agree that:

1.

2.

Land is undervalued by $

51,460

.

Equipment is overvalued by $5,310.

Terrell agrees to sell the gallery to Graf for $

381,180

.
Prepare the entry to record the purchase of Terrell Galleries on Graf’s books.
(Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Account Titles and Explanation

Debit

Credit

)

Net assets

of Terrell as reported

($581,150 – $351,760)

$229,390

Adjustments to fair value

Increase in land value

51,460

Decrease in equipment value

(5,310

46,150

Net assets of Terrell at fair value

275,540

Selling price

381,180

Amount of goodwill to be recorded

$105,640

On July 31, 2012, Mexico Company paid $3,004,200 to acquire all of the common stock of Conchita Incorporated, which became a division of Mexico. Conchita reported the following balance sheet at the time of the acquisition.

Total assets

Total liabilities and stockholders’ equity

$3,595,400

Current assets

$860,000

Current liabilities

$600,600

Noncurrent assets

2,735,400

Long-term liabilities

592,900

$3,595,400

Stockholders’ equity

2,401,900

It was determined at the date of the purchase that the fair value of the identifiable net assets of Conchita was $2,758,200. Over the next 6 months of operations, the newly purchased division experienced operating losses. In addition, it now appears that it will generate substantial losses for the foreseeable future. At December 31, 2012, Conchita reports the following balance sheet information.

Current assets

Current liabilities

)

Long-term liabilities

)

$457,600

Noncurrent assets (including goodwill recognized in purchase)

2,456,200

(729,500

(502,900

Net assets

$1,681,400

It is determined that the fair value of the Conchita Division is $1,852,500. The recorded amount for Conchita’s net assets (excluding goodwill) is the same as fair value, except for property, plant, and equipment, which has a fair value $

154,800

above the carrying value.
(a) Compute the amount of goodwill recognized, if any, on July 31, 2012.

$

The amount of goodwill

(b) Determine the impairment loss, if any, to be recorded on December 31, 2012.

$

The impairment loss

(c) Assume that fair value of the Conchita Division is

$1,629,900

instead of $1,852,500. Determine the impairment loss, if any, to be recorded on December 31, 2012.

The impairment loss

$

(d) Prepare the journal entry to record the impairment loss, if any, and indicate where the loss would be reported in the income statement.
(Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Account Titles and Explanation

Debit

Credit

This loss will be reported in income as a separate line item before the subtotal .

(a) Goodwill = Excess of the cost of the division over the fair value of the identifiable assets:
$3,004,200 – $2,758,200 = $

246,000


(b) No impairment loss is recorded, because the fair value of Conchita ($1,852,500) is greater than carrying value of the net assets ($1,681,400).
(c) Computation of impairment:

Implied fair value of goodwill

= Fair value of division less the carrying value of the division (adjusted for fair value changes), net of goodwill:

$1,681,400

)

)

Fair value of Conchita division

$1,629,900

Carrying value of division

Increase in fair value of PP&E

154,800

Less: Goodwill

246,000

(1,590,200

Implied fair value of goodwill

39,700

Carrying value of goodwill

(246,000

Impairment loss

($206,300

)

(d) This loss will be reported in income as a separate line item before the subtotal “income from continuing operations.”

Waterworld Company leased equipment from Costner Company. The lease term is 5 years and requires equal rental payments of $36,320 at the beginning of each year. The equipment has a fair value at the inception of the lease of $149,000, an estimated useful life of 5 years, and no salvage value. Waterworld pays all executory costs directly to third parties. The appropriate interest rate is 11%.
Prepare Waterworld’s January 1, 2012, journal entries at the inception of the lease.
(Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Account Titles and Explanation

Debit

Credit

(To record the lease.)

(To record first lease payment.)

Assume that IBM leased equipment that was carried at a cost of $150,000 to Sharon Swander Company. The term of the lease is 6 years beginning January 1, 2012, with equal rental payments of $30,044 at the beginning of each year. All executory costs are paid by Swander directly to third parties. The fair value of the equipment at the inception of the lease is $150,000. The equipment has a useful life of 6 years with no salvage value. The lease has an implicit interest rate of 8%, no bargain-purchase option, and no transfer of title. Collectibility is reasonably assured with no additional cost to be incurred by IBM.
Prepare IBM’s January 1, 2012, journal entries at the inception of the lease.
(Credit account titles are automatically indented when amount is entered. Do not indent manually. Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971.)

Account Titles and Explanation

Debit

Credit

(To record the lease.)

(To record first lease payment.)

Lease Receivable = (4.99271 x $30,044) = $150,000

Indiana Jones Corporation enters into a 7-year lease of equipment on January 1, 2012, which requires 7 annual payments of $36,510 each, beginning January 1, 2012. In addition, Indiana Jones guarantees the lessor a residual value of $20,530 at lease-end. The equipment has a useful life of 7 years.
Prepare Indiana Jones’ January 1, 2012, journal entries assuming an interest rate of 12%.
(Credit account titles are automatically indented when amount is entered. Do not indent manually. Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971.)

Account Titles and Explanation

Debit

Credit

(To record the lease.)

(To record first lease payment.)

=

Leased Equipment

PV of rentals

$36,510 x 5.11141

$186,618

PV of guar. RV

$20,530 x 0.45235

9,287

$195,905

On January 1, 2012, Adams Corporation signed a 7-year noncancelable lease for a machine. The terms of the lease called for Adams to make annual payments of $9,214 at the beginning of each year, starting January 1, 2012. The machine has an estimated useful life of 8 years and a $5,480 unguaranteed residual value. The machine reverts back to the lessor at the end of the lease term. Adams uses the straight-line method of depreciation for all of its plant assets. Adams’s incremental borrowing rate is 11%, and the lessor’s implicit rate is unknown.

(b)

Compute the present value of the minimum lease payments.
(Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971.)

The present value of the minimum lease payments

$

Computation of present value of minimum lease payments: $9,214 x 5.23054 = $48,194

(c)

The parts of this question must be completed in order. This part will be available when you complete the part above.

Wadkins Company, a machinery dealer, leased a machine to Romero Corporation on January 1, 2012. The lease is for an 8-year period and requires equal annual payments of $40,897 at the beginning of each year. The first payment is received on January 1, 2012. Wadkins had purchased the machine during 2011 for $172,000. Collectibility of lease payments is reasonably predictable, and no important uncertainties surround the amount of costs yet to be incurred by Wadkins. Wadkins set the annual rental to ensure an 10% rate of return. The machine has an economic life of 10 years with no residual value and reverts to Wadkins at the termination of the lease.

Compute the amount of the lease receivable.
(Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971.)

The amount of the lease receivable

$

The amount of the lease receivable = $40,897 x 5.86842 = $240,001

(a)

b. The parts of this question must be completed in order. This part will be available when you complete the part above.

On February 20, 2012, Hooke Inc., purchased a machine for $1,206,000 for the purpose of leasing it. The machine is expected to have a 10-year life, no residual value, and will be depreciated on the straight-line basis. The machine was leased to Sage Company on March 1, 2012, for a 4-year period at a monthly rental of

$13,200

. There is no provision for the renewal of the lease or purchase of the machine by the lessee at the expiration of the lease term. Hooke paid $30,096 of commissions associated with negotiating the lease in February 2012:
(a) What expense should Sage Company record as a result of the facts above for the year ended December 31, 2012?

$

Rent Expense

(b) What income or loss before income taxes should Hooke record as a result of the facts above for the year ended December 31, 2012? (Hint: Amortize commissions over the life of the lease.)

$

Income from lease before taxes

(a)

SAGE COMPANY
Rent Expense
For the Year Ended December 31, 2012

Monthly rental

$13,200

Lease period in 2013 (March–December)

x 10 months

$132,000

(b)

$132,000

Income from lease before taxes

HOOKE INC.
Income or Loss from Lease before Taxes
For the Year Ended December 31, 2012

Rental revenue ($15,600 x 10 months)

Less expense

Depreciation

$100,500

*

Commission

6,270

**

106,770

$25,230

*

=

=

$100,500

$1,206,000 cost ÷ 10 years

$120,600/year

$120,600 x 10/12

**Under principles of accrual accounting, the commission should be amortized over the life of the lease: $30,096 ÷ 4 years = $7,524 x 10/12 = $6,270.

The following facts pertain to a noncancelable lease agreement between Alschuler Leasing Company and McKee Electronics, a lessee, for a computer system.

6

years

11

%

Inception date

October 1, 2012

Lease term

6 years

Economic life of leased equipment

Fair value of asset at October 1, 2012

$317,912

Residual value at end of lease term

–0–

Lessor’s implicit rate

11 %

Lessee’s incremental borrowing rate

Annual lease payment due at the beginning of

each year, beginning with October 1, 2012

$

67,700

The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor. The lessee assumes responsibility for all executory costs, which amount to $5,220 per year and are to be paid each October 1, beginning October 1, 2012. (This $5,220 is not included in the rental payment of $67,700.) The asset will revert to the lessor at the end of the lease term. The straight-line depreciation method is used for all equipment.
The following amortization schedule has been prepared correctly for use by both the lessor and the lessee in accounting for this lease. The lease is to be accounted for properly as a capital lease by the lessee and as a direct-financing lease by the lessor.

$317,912

10/01/12

$67,700

67,700

67,700

67,700

67,700

60,990

–0–

$317,912

Date

Annual Lease
Payment/Receipt

Interest (11%) on Unpaid
Liability/Receivable

Reduction of Lease
Liability/Receivable

Balance of Lease
Liability/Receivable

10/01/12

$ 67,700

250,212

10/01/13

67,700

$27,523

40,177

210,035

10/01/14

23,104

44,596

165,439

10/01/15

18,198

49,502

115,937

10/01/16

12,753

54,947

60,990

10/01/17

6,710

$406,200

$88,288

(a) Assuming the lessor’s accounting period ends on September 30, answer the following questions with respect to this lease agreement.
(Round answers to 0 decimal places e.g. 58,971.)

(1) What items and amounts will appear on the lessor’s income statement for the year ending September 30, 2013?

$

(2) What items and amounts will appear on the lessor’s balance sheet at September 30, 2013?

$

$

$

$

Balance Sheet (Partial)
September 30, 2013

Current Assets

Noncurrent Assets

(3) What items and amounts will appear on the lessor’s income statement for the year ending September 30, 2014?

$

(4) What items and amounts will appear on the lessor’s balance sheet at September 30, 2014?

Current Assets

$

$

$

Noncurrent Assets

$

Balance Sheet (Partial)
September 30, 2014

(b) Assuming the lessor’s accounting period ends on December 31, answer the following questions with respect to this lease agreement.
(Round answers to 0 decimal places e.g. 58,971.)

(1) What items and amounts will appear on the lessor’s income statement for the year ending December 31, 2012?

$

(2) What items and amounts will appear on the lessor’s balance sheet at December 31, 2012?

Current Assets

$

$

$

Noncurrent Assets

$

Balance Sheet (Partial)
December 31, 2012

(3) What items and amounts will appear on the lessor’s income statement for the year ending December 31, 2013?

$

(4) What items and amounts will appear on the lessor’s balance sheet at December 31, 2013?

Current Assets

$

$

$

Noncurrent Assets

$

=

=

Interest revenue

=

=

Balance Sheet (Partial)
December 31, 2013

(b) (1)

Interest revenue

($27,523 x 3/12)

$6,881

(3)

[($27,523 – $6,881) + ($23,104 x 3/12) = [$20,642 + $5,776]

$26,418

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