CHAPTER 12 SOLUTIONS TO B EXERCISES E121B (15–20 minutes) (a) 1, 2, 3, 5, 9, 15, 17 (b) 10 11 12 13 14 16 18 19 20 21 22 23 Longterm investments, or other assets, in the balance sheet Expensed in the income statement Research and development expense in the income statement Research and development expense in the income statement Research and development expense in the income statement Property, plant, and equipment in the balance sheet Current asset (prepaid rent) in the balance sheet Research and development expense in the income statement Operating losses in the income statement Not recorded; any costs related to creating goodwill incurred internally must be expensed Research and development expense in the income statement Charge as expense in the income statement Charge as expense in the income statement Property, plant, and equipment in the balance sheet Research and development expense in the income statement Longterm investments in the balance sheet E122B (10–15 minutes) The following items would be classified as intangible assets: Cable television franchises Music copyrights Goodwill Internet domain name Film contract rights Customer lists Covenants not to compete Brand names Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 121 E122B (Continued) The following would be classified as current assets: Cash Accounts receivable Notes receivable Prepaid expenses The following would be classified as noncurrent assets in the property, plant, and equipment section: Property, plant, and equipment Land The following would be classified as part of the investments section of the balance sheet: Investments in affiliated companies The following would be classified as an operating expense: Research and development costs Discount on notes payable is shown as a deduction from the related notes payable on the balance sheet Organization costs are startup costs and should be expensed as incurred E123B (10–15 minutes) (a) (b) Trademarks Excess of cost over fair value of net assets of acquired subsidiary (goodwill) Total intangible assets $150,000 750,000 $900,000 Organization costs, $120,000, should be expensed. Discount on bonds payable, $45,000, should be reported as a contra account to bonds payable in the longterm liabilities section 122 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) E123B (Continued) Deposits with advertising agency for ads to promote goodwill of company, $25,000, should be reported either as an expense or as prepaid advertising in the current assets section. Advertising costs in general are expensed when incurred or when first used Cost of equipment acquired for research and development projects, $300,000, should be reported with property, plant, and equipment, because the equipment has an alternative use Costs of developing a secret formula for a product that is expected to be marketed for at least 20 years, $800,000, should be classified as research and development expense on the income statement E124B (15–20 minutes) Tartabull should report the patent at $1,280,000 (net of $720,000 accu mulated amortization) on the balance sheet. The computation of accumu lated amortization is as follows Amortization for 2012 and 2013 ($2,000,000 / 10) X 2 2014 amortization: ($2,000,000 – $400,000) ÷ (7 – 2) Accumulated amortization, 12/31/14 $400,000 320,000 $720,000 Tartabull should amortize the franchise over its estimated useful life Because it is uncertain that Tartabull will be able to retain the franchise at the end of 2022, it should be amortized over 10 years. The amount of amortization on the franchise for the year ended December 31, 2014, is $80,000 (i.e., $800,000/10) These costs should be expensed as incurred (all in 2013) Because the license can be easily renewed (at nominal cost), it has an indefinite life. Thus, no amortization will be recorded. The license will be tested for impairment in future periods Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 123 E125B (15–20 minutes) Research and Development Expense 1,160,000 Patents 30,000 Advertising Expense 126,000 Income Summary (or a loss account) 86,000 Interest Expense Premium on Bonds Payable Paid in Capital in Excess of Par on Common Stock Intangible Assets 780 61,620 600,000 739,600 *62,400 ÷ 240 months = $260; $260 X 3 = $780; $62,400 – $780 = $61,620 Patent Amortization Expense [($30,000 ÷ 12) X 1/2] Patents (or Accumulated Amortization) 1,250 1,250 E126B (15–20 minutes) Patents Goodwill Franchise Copyright Research and Development Expense Intangible Assets 525,000 540,000 675,000 234,000 322,500 Amortization Expense 118,875 Patents ($525,000/8) Franchise ($675,000/10 X 6/12) Copyright ($234,000/5 X 5/12) 2,296,500 65,625 33,750 19,500 Balance of Intangible Assets as of December 31, 2014: Patents = $525,000 – $65,625 = $459,375 Goodwill = $540,000 (no amortization) Franchise = $675,000 – $33,750 = $641,250 Copyright = $234,000$19,500=$214,500 12ư4 Copyrightâ2013JohnWiley&Sons,Inc.Kieso,IntermediateAccounting,15/e,ExerciseBSolutions(ForInstructorUseOnly) E12ư7B(1015minutes) (a) 2013amortization:$50,000ữ10=$5,000 12/31/13bookvalue:$50,000$5,000=$45,000 2014amortization:($45,000+$20,000)ữ9=$7,222 12/31/14bookvalue:($45,000+$20,000$7,222)=$57,778 (b) 2014 amortization: ($45,000 + $20,000) ÷ 4 = $16,250 12/31/14 book value: $45,000 + $20,000 – $16,250 = $48,750 (c) Carrying amount ($57,778) > future cash flows ($17,000); thus the trade name fails the recoverability test. The new carrying value is $10,000 2015 amortization (after recording impairment loss): $10,000 ÷ 8 = $1,250 12/31/15 book value: $10,000 – $1,250 = $8,750 E128B (10–15 minutes) (a) Attorney’s fees in connection with organization of the company Costs of meetings of incorporators to discuss organizational activities State filing fees to incorporate Total organization costs $26,000 17,000 1,000 $44,000 Testing equipment, $61,000, should be classified as part of fixed assets, rather than as organization costs. Costs of meetings with potential customers should classified as advertising/marketing expense (b) Organization Cost Expense 44,000 Cash (Payables) 44,000 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 125 E129B (15–20 minutes) (a) YOUNT COMPANY Intangibles Section of Balance Sheet December 31, 2014 Patent from Ford Company, net of accumulated amortization of $280,000 (Schedule 1) $ 720,000 Franchise from Reagan Company, net of accumulated amortization of $96,000 (Schedule 2) 864,000 Total intangibles $1,584,000 Schedule 1 Computation of patent from Ford Company: Cost of patent at date of purchase $1,000,000 Amortization of patent for 2013 ($1,000,000 ÷ 10 years) (100,000) 900,000 Amortization of patent for 2014 ($900,000 ÷ 5 years) (180,000) Patent balance $ 720,000 Schedule 2 Computation of franchise from Reagan Company: Cost of franchise at date of purchase $960,000 Amortization of franchise for 2014 ($960,000 ÷ 10) (96,000) Franchise balance $864,000 (b) YOUNT COMPANY Income Statement Effect For the year ended December 31, 2014 Patent from Ford Company: Amortization of patent for 2014 ($900,000 ÷ 5 years) $ 180,000 Franchise from Reagan Company: Amortization of franchise for 2014 ($960,000 ÷ 10) $ 96,000 Payment to Reagan Company ($5,000,000 X 5%) 250,000 346,000 Research and development costs 797,000 Total charged against income $1,323,000 126 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) E1210B (15–20 minutes) (a) (b) 2010 Research and Development Expense 510,000 Cash 510,000 Patents 54,000 Cash 54,000 Patent Amortization Expense 1,350 Patents [($54,000 ÷ 10) X 3/12] 1,350 2011 Patent Amortization Expense 5,400 Patents ($54,000 ÷ 10) 5,400 2012 Patents 28,440 Cash 28,440 Patent Amortization Expense 5,820 Patents ($2,250 + $3,570) [Jan. 1—June 1: ($54,000 ÷ 10) X 5/12 = $2,250 June 1—Dec. 31: ($54,000 – $1,350 – $5,400 – $2,250 + $28,440) = $73,440; ($73,440 ÷ 12) X 7/12 = $3,570] 2013 Patent Amortization Expense 6,120 Patents ($73,440 ÷ 12) (c) 2014 and 2015 Patent Amortization Expense 31,875 Patents ($63,750 ÷ 2) ($73,440 – $3,570 – $6,120) = $63,750 5,820 6,120 31,875 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 127 E1211B (20–25 minutes) (a) Patent A Life in years Life in months (12 X 20) Amortization per month Number of months amortized to date Year 2011 2012 2013 2014 20 240 $200 Month 10 12 12 12 46 Book value 12/31/14: $38,800 ($48,000 – [46 X $200]) Patent B Life in years Life in months (12 X 10) Amortization per month Number of months amortized to date Year 2012 2013 2014 10 120 $160 Month 6 12 12 30 Book value 12/31/14: $14,400 ($19,200 – [$160 X 30]) 128 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) E1211B (Continued) Patent C Life in years Life in months (12 X 8) Amortization per month Number of months amortized to date Year 2013 2014 96 $175 Month 4 12 16 Book value 12/31/14: $14,000 ($16,800 – [$175 X 16]) At December 31, 2014 Patent A Patent B Patent C Total (b) $38,800 14,400 14,000 $67,200 Analysis of 2015 transactions: The $347,000 incurred for research and development should be expensed The book value of Patent B is $14,400 and its estimated future cash flows are $7,500 (3 X $2,500); therefore Patent B is impaired The impairment loss is imputed as follows: Book value $14,400 Less: Present value of future cash flows 2,500 X 2.57710 6,443 Loss recognized $ 7,957 Patent B carrying amount (12/31/15): $6,443 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 129 E1211B (Continued) At December 31, 2015: Patent A $36,400 ($38,800 – [12 X $200]) Patent B 6,443 (Present value of future cash flows) Patent C 11,900 ($14,000 – [12 X $175]) Patent D 10,350 ($10,800 – $450*) Total $65,093 Patent D amortization: Life in years Life in months Amortization per month $75 X 6 = $450 12 144 $75 E1212B (15 minutes) Net assets of Ruth as reported Adjustments to fair value Increase in land value Decrease in equipment value Net assets of Ruth at fair value Selling price Amount of goodwill to be recorded $540,000 $72,000 (12,000) 60,000 600,000 840,000 $240,000 The journal entry to record this transaction is as follows: Cash Land Building Equipment Copyright Goodwill Accounts Payable Longterm Notes Payable Cash 240,000 240,000 480,000 408,000 72,000 240,000 120,000 720,000 840,000 1210 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) E1213B (10–15 minutes) (a) Cash 37,500 Receivables .67,500 Inventory 93,750 Land 45,000 Buildings 56,250 Equipment .52,500 Copyrights .11,250 Goodwill 48,750 Accounts Payable Notes Payable Cash 150,000 75,000 187,500 Note that the building and equipment would be recorded at the 7/1/13 cost to Griffey; accumulated depreciation accounts would not be recorded (b) Amortization Expense (Copyrights) 1,125 Copyrights ([$11,250 – $2,250] 1/4 X 6/12) 1,125 E1214B (15–20 minutes) (a) December 31, 2014 Loss on Impairment Copyrights *Carrying amount Fair value Loss on impairment 2,470,000* 2,470,000 $6,320,000 3,850,000 $2,470,000 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 1211 E1214B (Continued) (b) Copyright Amortization Expense Copyrights *New carrying amount Useful life Amortization per year (c) 385,000* 385,000 $3,850,000 ÷ 10 years $ 385,000 No entry is necessary Restoration of any impairment loss is not permitted for assets held for use E1215B (15–20 minutes) (a) December 31, 2014 Loss on Impairment 12,000,000 Goodwill 12,000,000 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 Carrying amount of division, net of goodwill Implied value of goodwill Carrying value of goodwill Loss on impairment (b) $268,000,000 120,000,000 148,000,000 (160,000,000) $ 12,000,000 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 1212 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) E1216B (15–20 minutes) (a) The $183,000 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 211,000 Cash, Accts. Payable, etc (To record research and development costs) Patents 12,000 Cash, Accts. Payable, etc (To record legal and administrative costs incurred to obtain patent ) Patent Amortization Expense 2,000 Patents [To record one year’s amortization expense ($12,000 ÷ 6 = $2,000)] (c) Patents 18,600 Cash, Accts. Payable, etc (To record legal cost of successfully defending patent) 211,000 12,000 2,000 18,600 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 5,720 Patents (To record one year’s amortization Expense: $12,000 – $2,000 = $10,000; $10,000 ÷ 5 = $18,600 ÷ 5 = Amortization expense for 2015 Or Carrying value after 1 year Cost to defend Expense: $28,600 ÷ 5 = $5,720 5,720 $2,000 3,750 $5,720 $10,000 18,600 $28,600 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 1213 E1216B (Continued) (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 E1217B (10–12 minutes) Depreciation of equipment acquired that will have alternate uses in future research and development projects over the next 5 years ($300,000 ÷ 5) 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 Total to be expensed in 2014 for research and development $ 60,000 75,000 123,000 215,000 48,000 $521,000 *E1218B (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 straightline method over the remaining useful life of the asset to amortize capitalized computer software costs (b) Percentofrevenue approach: $4,000,000 X $7,200,000 = $1,200,000 $24,000,000 Straightline method: 1/5 X $7,200,000 = 1,440,000 Amortization for 2014 would be $1,440,000 by the straightline method because it results in the greater amount 1214 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) *E1219B (15–20 minutes) (a) Research and Development Expense 5,000,000 Cash 5,000,000 Computer Software Costs ($8,600,000 – $5,000,000) 3,600,000 Cash 3,600,000 (b) Amortization Expense* 900,000 Computer Software Costs 900,000 *Percent of revenue, $3,500,000 / $35,000,000 = 10%; 10% X $3,600,000 = $360,000; Straightline, 1/4 X $3,600,000 =$900,000 Use straightline because it’s greater than the percent of revenue approach, 1/4 = 25% (c) The computer software costs should be reported in the 12/31/15 balance sheet at unamortized cost ($3,600,000 – $900,000 = $2,700,000) unless net realizable value is lower (d) Extel Computing, Inc. Enterprises should disclose in its December 31, 2015, financial statements the unamortized computer software costs included in the balance sheet presented, and the total amount charged to expense in the income statement presented for amortization of capitalized computer software costs and for amounts written down to net realizable value (e) The accounting guidance in this area applies only to the development of computer software that is to be sold, leased, or otherwise marketed to third parties. No authoritative literature specifically addresses the issue of computer software developed for internal use. In practice, such costs are generally expensed as incurred Therefore, the total of $8,600,000 would be expensed in (a), there would be no amortization in (b), and computer software costs would not be reported on the balance sheet in (c) Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 1215 ... 122 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) E123B (Continued) Deposits with advertising agency for ads to promote goodwill of company,... Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 123 E125B (15–20 minutes) Research and Development Expense... 12ư4 Copyrightâ2013JohnWiley&Sons,Inc.Kieso,IntermediateAccounting,15/e,ExerciseBSolutions(ForInstructorUseOnly) E12ư7B(1015minutes) (a) 2013amortization:$50,000ữ10=$5,000