Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
S-A E 297 (Cont.)
PRS' accountant, Kelly Hall, initially recorded the cash payments as "Loss from Lawsuit" and
"Product Development," respectively. However, Gilbert Brown, the controller, instructed Kelly to
create an intangible asset, named "Goodwill," and charge both costs to this account. "We're
protected from another lawsuit as long as this agreement is in effect," he says. "It's about as
close to goodwill as we'll ever get from our competitors. We might as well amortize the cost rather
than take the full hit to income, anyway."
1. What are the ethical issues?
2. What should Kelly do?
S-A E 298 (Communication)
The Old Fix-It is a company specializing in the restoration of old homes. To showcase its work,
the company purchased an old Victorian home in downtown Pittsburg, Kansas on January 2,
2013. The original home was purchased for $125,000. A new heating and air-conditioning system
was added for $30,000. The house was completely rewired and re-plumbed at a cost of $50,000.
Custom cabinets were added, and the floors and trim were refurbished to their original condition,
at a cost of $75,000.
The project was such a success, that Old Fix-It decided on January 2, 2017, to purchase another
very large home, this time in nearby Joplin, Missouri. On January 3, 2017, a realtor offered to
purchase the home in Pittsburg for $175,000. He plans to lease it as luxury short-term apartments
for visiting dignitaries. Mark Gibson, the president of Old Fix-It, decided that the $50,000 gain
over purchase price was appropriate, and so he agreed to sell the showcase house. Only
afterward did he learn that Old Fix-It had a loss of almost $30,000 on the sale. Mark does not
believe that a loss is possible. "We sold that house for more than we paid for it," he said. "I know
we put some money in it, but we had depreciated it for four years. How in the world can we have
Due to the commercial aspects of the property and its expected traffic flow, the life of the
showcase house was established as 15 years. Old Fix-It utilized straight-line depreciation with no
salvage or residual value. Old Fix-It took full years’ of depreciation in 2013 through 2016 and
none in 2017 due to the sale date of January 3, 2017.