c12BExercises.qxd 10/10/12 8:37 PM Page B EXERCISES E12-1B (Classification Issues—Intangibles) Presented below is a list of items that could be included in the intangible assets section of the balance sheet 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Cost of purchasing a patent from an inventor Unrecovered costs of a successful legal suit to protect the patent Cost of purchasing a copyright Long-term receivables Cost of purchasing a trademark Cost of developing a trademark Research and development costs Cost of conceptual formulation of possible product alternatives Legal costs incurred in securing a patent Cost of developing a patent Timberland Lease prepayment (6 months’ rent paid in advance) Cost of searching for applications of new research findings Operating losses incurred in the start-up of a business Purchase cost of a franchise Goodwill generated internally Goodwill acquired in the purchase of a business Cost of testing in search for product alternatives Training costs incurred in start-up of new operation Costs incurred in the formation of a corporation Cost of equipment obtained Cost of engineering activity required to advance the design of a product to the manufacturing stage Investment in a subsidiary company Instructions (a) Indicate which items on the list above would generally be reported as intangible assets in the balance sheet (b) Indicate how, if at all, the items not reportable as intangible assets would be reported in the financial statements E12-2B (Classification Issues—Intangibles) Presented below is selected account information related to Fryman Inc at year-end All these accounts have debit balances Brand names Film contract rights Research and development costs Covenants not to compete Cash Notes receivable Accounts receivable Property, plant, and equipment Land Music copyrights Customer lists Prepaid expenses Goodwill Cable television franchises Discount on notes payable Investments in affiliated companies Organization costs Internet domain name Instructions Identify which items should be classified as an intangible asset For those items not classified as intangible assets, indicate where each would be reported in the financial statements E12-3B (Classification Issues—Intangible Asset) Williams Inc has the following amounts included in its general ledger at the end of the current year Organization costs Trademarks Discount on bonds payable Deposits with advertising agency for ads to promote goodwill of company Excess of cost over fair value of net identifiable assets of acquired subsidiary Cost of equipment acquired for research and development projects; the equipment has an alternative future use Costs of developing a secret formula for a product that is expected to be marketed for at least 20 years $120,000 150,000 45,000 25,000 750,000 300,000 800,000 c12BExercises.qxd • 10/10/12 8:37 PM Page Chapter 12 Intangible Assets Instructions (a) On the basis of the information above, compute the total amount to be reported by Williams for intangible assets on its balance sheet at year-end Equipment has alternative future use (b) If an item is not to be included in intangible assets, explain its proper treatment for reporting purposes E12-4B (Intangible Amortization) resented below is selected information for Tartabull Company Tartabull purchased a patent from Vania Co for $2,000,000 on January 1, 2012 The patent is being amortized over its remaining legal life of 10 years, expiring on January 1, 2022 During 2014, Tartabull determined that the economic benefits of the patent would not last longer than years from the date of acquisition What amount should be reported in the balance sheet for the patent, net of accumulated amortization, at December 31, 2014? Tartabull bought a franchise from Alexander Co on January 1, 2013, for $800,000 The carrying amount of the franchise on Alexander’s books on January 1, 2013, was $600,000 The franchise agreement had an estimated useful life of 20 years Because Tartabull must enter a competitive bidding at the end of 2022, it is unlikely that the franchise will be retained beyond 2022 What amount should be amortized for the year ended December 31, 2014? On January 1, 2013, Tartabull incurred organization costs of $500,000 What amount of organization expense should be reported in 2014? Tartabull purchased the license for distribution of a popular consumer product on January 1, 2014, for $400,000 It is expected that this product will generate cash flows for an indefinite period of time The license has an initial term of years but by paying a nominal fee, Tartabull can renew the license indefinitely for successive 5-year terms What amount should be amortized for the year ended December 31, 2014? Instructions Answer the questions asked about each of the situations E12-5B (Correct Intangible Asset Account) As the recently appointed auditor for Clinton Corporation, you have been asked to examine selected accounts before the 6-month financial statements of June 30, 2014, are prepared The controller for Clinton Corporation mentions that only one account is kept for Intangible Assets Intangible Assets Debit Jan Feb Mar Apr May June 30 Premium on common stock Promotional expenses related to start-up of business Research and development costs Unamortized bond premium on 20 year bonds due March 31, 2034 Legal costs to protect patent Operating losses for first months Credit 600,000 Balance (600,000) 126,000 1,160,000 (474,000) 686,000 62,400 30,000 86,000 623,600 653,600 739,600 Instructions Prepare the entry or entries necessary to correct this account Assume that the patent has a useful life of 12 years E12-6B (Recording and Amortization of Intangibles) Parrish Company, organized in 2011, has set up a single account for all intangible assets The following summary discloses the debit entries that have been recorded during 2014 1/2/14 4/1/14 7/1/14 8/1/14 9/1/14 Purchased patent (8-year life) Purchased goodwill (indefinite life) Purchased franchise with 10-year life; expiration date 7/1/19 Payment for copyright (5-year life) Research and development costs $ 525,000 540,000 675,000 234,000 322,500 $2,296,500 Instructions Prepare the necessary entries to clear the Intangible Assets account and to set up separate accounts for distinct types of intangibles Make the entries as of December 31, 2014, recording any necessary amortization and reflecting all balances accurately as of that date (Use straight-line amortization.) c12BExercises.qxd 10/10/12 8:37 PM Page B Exercises E12-7B (Accounting for Trade Name) In early January 2013, Strawberry Corporation applied for a trade name, incurring legal costs of $50,000 In January 2014, Strawberry incurred $20,000 of legal fees in a successful defense of its trade name Instructions (a) Compute 2013 amortization, 12/31/13 book value, 2014 amortization, and 12/31/14 book value if the company amortizes the trade name over 10 years (b) Compute the 2014 amortization and the 12/31/14 book value, assuming that at the beginning of 2014, Strawberry determines that the trade name will provide no future benefits beyond December 31, 2017 (c) Ignoring the response for part (b), compute the 2015 amortization and the 12/31/15 book value, assuming that at the beginning of 2015, based on new market research, Strawberry determines that the fair value of the trade name is $10,000 Estimated total future cash flows from the trade name is $17,000 on January 3, 2015 E12-8B (Accounting for Organization Costs) Thermo Corporation was organized in 2013 and began operations at the beginning of 2014 The company is involved in energy development The following costs were incurred prior to the start of operations Costs of meetings of incorporators to discuss organizational activities Attorney’s fees in connection with organization of the company Purchase of testing equipment Costs of meetings with potential customers State filing fees to incorporate $ 17,000 26,000 61,000 3,000 1,000 $108,000 Instructions (a) Compute the total amount of organization costs incurred by Thermo (b) Prepare the journal entry to record organization costs for 2014 E12-9B (Accounting for Patents, Franchises, and R & D) Yount Company has provided information on intangible assets as follows A patent was purchased from Ford Company for $1,000,000 on January 1, 2013 Yount estimated the remaining useful life of the patent to be 10 years The patent was carried in Ford’s accounting records at a net book value of $800,000 when Ford sold it to Yount During 2014, a franchise was purchased from Reagan Company for $960,000 In addition, 5% of revenue from the franchise must be paid to Reagan Revenue from the franchise for 2014 was $5,000,000 Yount estimates the useful life of the franchise to be 10 years and takes a full year’s amortization in the year of purchase Yount incurred research and development costs in 2014 as follows Materials and equipment Personnel Indirect costs $346,000 278,000 173,000 $797,000 Yount estimates that these costs will be recouped by December 31, 2017 The materials and equipment purchased have no alternative uses On January 1, 2014, because of recent events in the field, Yount estimates that the remaining life of the patent purchased on January 1, 2013, is only years from January 1, 2014 Instructions (a) Prepare a schedule showing the intangibles section of Yount’s balance sheet at December 31, 2014 Show supporting computations in good form (b) Prepare a schedule showing the income statement effect (related to expenses) for the year ended December 31, 2014, as a result of the facts above Show supporting computations in good form (AICPA adapted) E12-10B (Accounting for Patents) During 2008, Burks Corporation spent $510,000 in research and development costs As a result, a new product called the New Age Piano was patented The patent was obtained on October 1, 2010, and had a legal life of 20 years and a useful life of 10 years Legal costs of $54,000 related to the patent were incurred as of October 1, 2010 • c12BExercises.qxd • 10/10/12 8:37 PM Page Chapter 12 Intangible Assets Instructions (a) Prepare all journal entries required in 2010 and 2011 as a result of the transactions above (b) On June 1, 2012, Burks spent $28,440 to successfully prosecute a patent infringement As a result, the estimate of useful life was extended to 12 years from June 1, 2010 Prepare all journal entries required in 2012 and 2013 (c) In 2014, Burks determined that a competitor’s product would make the New Age Piano obsolete and the patent worthless by December 31, 2015 Prepare all journal entries required in 2014 and 2015 E12-11B (Accounting for Patents) Thomas Industries has the following patents on its December 31, 2014, balance sheet Patent Item Initial Cost Date Acquired Useful Life at Date Acquired Patent A Patent B Patent C $48,000 $19,200 $16,800 3/1/11 7/1/12 9/1/13 20 years 10 years years The following events occurred during the year ended December 31, 2015 Research and development costs of $347,000 were incurred during the year Patent D was purchased on July for $10,800 This patent has a useful life of 12 years As a result of reduced demands for certain products protected by Patent B, a possible impairment of Patent B’s value may have occurred at December 31, 2015 The controller for Thomas estimates the future cash flows from Patent B will be as follows Year Future Cash Flows 2016 2017 2018 $2,500 $2,500 $2,500 The proper discount rate to be used for these flows is 8% (Assume that the cash flows occur at the end of the year.) Instructions (a) Compute the total carrying amount of Thomas’s patents on its December 31, 2014, balance sheet (b) Compute the total carrying amount of Thomas’s patents on its December 31, 2015, balance sheet E12-12B (Accounting for Goodwill) Palmer, owner of Palmer Interiors, is negotiating for the purchase of Ruth Inc The balance sheet of Ruth Inc is given in an abbreviated form, as follows RUTH INC BALANCE SHEET AS OF DECEMBER 31, 2014 Assets Cash Land Building (net) Equipment (net) Copyright (net) Total assets Liabilities and Stockholders’ Equity $ 240,000 168,000 480,000 420,000 72,000 $1,380,000 Accounts payable Long-term notes payable Total liabilities Common stock Retained earnings Total liabilities and stockholders’ equity Palmer and Ruth agree that: Land is undervalued by $72,000 Equipment is overvalued by $12,000 Ruth agrees to sell the business to Palmer for $840,000 Instructions Prepare the entry to record the purchase of Ruth Inc on Palmer’s books $ 120,000 720,000 840,000 $480,000 60,000 540,000 $1,380,000 c12BExercises.qxd 10/17/12 9:22 PM Page B Exercises E12-13B (Accounting for Goodwill) On July 1, 2013, Griffey Corporation purchased Johnson Company by paying $187,500 cash and issuing a $75,000 note payable to Steve Johnson At July 1, 2013, the balance sheet of Johnson Company was as follows Cash Receivables Inventory Land Buildings (net) Equipment (net) Copyrights $ 37,500 67,500 75,000 30,000 56,250 52,500 7,500 Accounts payable Stockholders’ equity $150,000 176,250 $326,250 $326,250 The recorded amounts all approximate current values except for land (worth $45,000), inventory (worth $93,750), and copyrights (worth $11,250) Instructions (a) Prepare the July entry for Griffey Corporation to record the purchase (b) Prepare the December 31 entry for Griffey Corporation to record amortization of intangibles The copyrights have an estimated useful life of years with a residual value of $2,250 E12-14B (Copyright Impairment) Presented below is information related to copyrights owned by Fielder Company at December 31, 2014 Cost Carrying amount Expected future net cash flows Fair value $10,450,000 6,320,000 5,000,000 3,850,000 Assume that Fielder Company will continue to use this copyright in the future As of December 31, 2014, the copyright is estimated to have a remaining useful life of 10 years Instructions (a) Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2014 The company does not use accumulated amortization accounts (b) Prepare the journal entry to record amortization expense for 2015 related to the copyrights (c) The fair value of the copyright at December 31, 2015, is $4,800,000 Prepare the journal entry (if any) necessary to record the increase in fair value E12-15B (Goodwill Impairment) Presented below is net asset information related to the Salmon Division of Horton, Inc SALMON DIVISION NET ASSETS AS OF DECEMBER 31, 2014 (IN MILLIONS) Cash Receivables Property, plant, and equipment (net) Goodwill Less: Notes payable $ 40 160 2,080 160 (2,160) Net assets $ 280 The purpose of the Salmon division is to develop a nuclear-powered aircraft If successful, traveling delays associated with refueling could be substantially reduced Many other benefits would also occur To date, management has not had much success and is deciding whether a write-down at this time is appropriate Management estimated its future net cash flows from the project to be $320 million Management has also received an offer to purchase the division for $268 million The identifiable book and fair value amounts of all assets and liabilities are the same • c12BExercises.qxd • 10/10/12 8:37 PM Page Chapter 12 Intangible Assets Instructions (a) Prepare the journal entry (if any) to record the impairment at December 31, 2014 (b) At December 31, 2015, it is estimated that the division’s fair value increased to $276 million Prepare the journal entry (if any) to record this increase in fair value E12-16B (Accounting for R&D Costs) Hunt Company from time to time embarks on a research program when a special project seems to offer possibilities In 2013 the company expends $183,000 on a research project, but by the end of 2013 it is impossible to determine whether any benefit will be derived from it Instructions (a) What account should be charged for the $183,000, and how should it be shown in the financial statements? (b) The project is completed in 2014, and a successful patent is obtained The R&D costs to complete the project are $211,000 The administrative and legal expenses incurred in obtaining the patent in 2014 total $12,000 The patent has an expected useful life of years Record these costs in journal entry form Also, record patent amortization (full year) in 2014 (c) Additional engineering and consulting costs incurred in 2015 required to advance the design of a product to the manufacturing stage total $82,000 These costs enhance the design of the product considerably Discuss the proper accounting treatment for this cost (d) In 2016, the company successfully defends the patent in extended litigation at a cost of $18,600 What is the proper way to account for this cost? Also, record patent amortization (full year) in 2016 E12-17B (Accounting for R&D Costs) Tettleton Company incurred the following costs during the current year in connection with its research and development activities Cost of equipment acquired that will have alternative uses in future research and development projects over the next years (uses straight-line depreciation) Materials consumed in research and development projects Consulting fees paid to outsiders for research and development projects Personnel costs of persons involved in research and development projects Indirect costs reasonably allocable to research and development projects Materials purchased for future research and development projects $300,000 75,000 123,000 215,000 48,000 72,000 Instructions Compute the amount to be reported as research and development expense by Tettleton on its income statement for the current year Assume equipment is purchased at the beginning of the year 11 *E12-18B (Accounting for Computer Software Costs) Wallach Inc has capitalized computer software costs of $7,200,000 on its new “Trenton” software package Revenues from 2014 (first year) sales are $4,000,000 Additional future revenues from “Trenton” for the remainder of its economic life, through 2018, are estimated to be $20,000,000 Instructions (a) What method or methods of amortization are to be applied in the write-off of capitalized computer software costs? (b) Compute the amount of amortization for 2014 for “Trenton.” 11 *E12-19B (Accounting for Computer Software Costs) During 2014, Extel Computing Inc spent $8,600,000 developing its new software package Of this amount, $5,000,000 was spent before technological feasibility was established for the product, which is to be marketed to third parties The package was completed at December 31, 2014 Extel expects a useful life of years for this product with total revenues of $35,000,000 During the first year (2015), Extel realizes revenues of $3,500,000 Instructions (a) Prepare journal entries required in 2014 for the foregoing facts (b) Prepare the entry to record amortization at December 31, 2015 (c) At what amount should the computer software costs be reported in the December 31, 2015, balance sheet? Could the net realizable value of this asset affect your answer? (d) What disclosures are required in the December 31, 2015, financial statements for the computer software costs? (e) How would your answers for (a), (b), and (c) be different if the computer software was developed for internal use? ... balances accurately as of that date (Use straight-line amortization.) c12BExercises.qxd 10/10/12 8:37 PM Page B Exercises E12-7B (Accounting for Trade Name) In early January 2013, Strawberry Corporation... books $ 120,000 720,000 840,000 $480,000 60,000 540,000 $1,380,000 c12BExercises.qxd 10/17/12 9:22 PM Page B Exercises E12-13B (Accounting for Goodwill) On July 1, 2013, Griffey Corporation purchased... $10,000 Estimated total future cash flows from the trade name is $17,000 on January 3, 2015 E12-8B (Accounting for Organization Costs) Thermo Corporation was organized in 2013 and began operations