Chapter 8: Operating Assets: Property, Plant and Equipment, and Intangibles
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
219. A company purchased an asset on January 1, 2014, for $10,000. The asset was expected to have a ten-year life and a
$1,000 salvage value. The company uses the straight-line method of depreciation. On January 1, 2016, the company made
a major repair to the asset of $5,000, extending its life. The asset is expected to last ten years from January 1, 2016.
Calculate the amount of depreciation for 2016.
ANSWER:
Original cost, January 1, 2014
$10,000
Less: Accumulated depreciation (2 years at $900 per year)
(1,800)
Book value, January 1, 2016
$ 8,200
Plus: Major overhaul
5,000
Less: Residual value
(1,000)
Remaining depreciable amount
$12,200
Depreciation = Remaining Depreciable Amount/Remaining Life
Depreciation per Year = $12,200/10 years = $1,220
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.08-07 – LO: 08-07
KEYWORDS:
Bloom’s: Analyzing
$6,800 × 6/12 = $3,400.
July 1
Cash
52,000
Accumulated Depreciation—Asset
17,000*
Gain on Sale of Asset
220. Assume that Rocket Company purchased an asset on January 1, 2014, for $62,400. The asset had an estimated life of
eight years and an estimated residual value of $8,000. The company used the straight-line method to depreciate the asset.
On July 1, 2016, the asset was sold for $52,000.
Required:
1. Make the journal entry to record depreciation for 2016. Record all transactions necessary for the sale of the asset.
2. How should the gain or loss on the sale of the asset be presented on the income statement?
ANSWER:
1.
July 1
3,400
3,400
$20,100 × 6/12 = $10,050.
July 1
Note Receivable
22,000
Accumulated Depreciation—Asset
Gain on Sale of Asset
221. Assume that Halpern Company purchased an asset on January 1, 2015, for $122,800. The asset had an estimated life
of six years and an estimated residual value of $2,200. The company used the straight-line method to depreciate the asset.
Assume that Halpern Company sold the asset on July 1, 2016, and received $96,000 cash and a note for an additional
$22,000.
Required:
1. Make the journal entry to record depreciation for 2016. Record all transactions necessary for the sale of the asset.
2. How should the gain or loss on the sale of the asset be presented on the income statement?
ANSWER:
1.
July 1
Depreciation Expense
10,050
Accumulated Depreciation—Asset
10,050
To record depreciation to July 1 for 1/2 year
in 2016
($122,800 – $2,200)/6 years = $20,100 per
Chapter 8: Operating Assets: Property, Plant and Equipment, and Intangibles
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
222. Below are several accounts and balances from the 2016 financial statements for Torrent, Inc. Prepare the intangible
asset section of the company’s balance sheet, as well as a partial income statement in the space provided below using the
accounts provided.
Amortization expense
$ 32,000
Amortization since inception
89,000
Loss on sale of copyright
12,000
Copyright
120,000
Patents
60,000
Land
80,000
Goodwill
140,000
Research and development costs
160,000
BALANCE SHEET
INCOME STATEMENT
ANSWER:
BALANCE SHEET
Intangible Assets:
Copyright
$120,000
Patents
60,000
Goodwill
140,000
Total Intangible assets
$320,000
Less: Accumulated amortization
(89,000)
Total Intangible Assets
$231,000
INCOME STATEMENT
Operating Expenses:
Amortization expense
$ 32,000
Research and development costs
160,000
Other Income and Expenses
Loss on sale of copyright
$(12,000)
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.08-09 – LO: 08-09
FACC.PONO.13.08-10 – LO: 08-10
KEYWORDS:
Bloom’s: Analyzing
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
223. Given below are costs incurred by Bunker Company during 2016 and 2017. Bunker follows the policy of decreasing
the intangible asset account directly as amortized.
Research was conducted to discover a new product and costs of $200,000 in 2016 and $80,000 in 2017 were incurred.
After several months, a product was created and a patent secured for a cost of $150,000, effective as of July 1, 2017. The
company expects to have increased revenues of $500,000 over the next several years. The patent is expected to be useful
for the next 10 years.
A.
Prepare a partial income statement for the year ended December 31, 2017.
B.
How should the $80,000 cost incurred in 2017 be reported on the financial statements?
ANSWER:
A. Income Statement:
Operating expenses:
Research and development costs
$80,000
Patent amortization expense
7,500
([$150,000 cost/10 years] × 1/2 year)
B. The costs to discover the new product are considered research and development costs
which are reported on the income statement as an expense. These costs should be expensed
when incurred since future benefits are not predictable.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.08-09 – LO: 08-09
FACC.PONO.13.08-10 – LO: 08-10
KEYWORDS:
Bloom’s: Analyzing
224. Wang Fitness Co. purchased a patent at the beginning of 2016 for $120,000. Economic benefits were expected for
only 12 years, but the patent’s legal life is 17 years. Also during 2016, the company incurred research and development
costs of $50,000.
A. Determine the following amounts:
1.
Research and development expense for 2016
2.
Patent amortization expense for 2016
B. Prepare the intangible assets section of the balance sheet at December 31, 2016.
ANSWER:
A. Expense amounts for 2016
Research and development expense
$ 50,000
Patent amortization expense
10,000
B. Intangible Assets section of balance sheet at December 31, 2016
Patents
$110,000
[$120,000 – ($10,000 × 1)]
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.08-09 – LO: 08-09
FACC.PONO.13.08-10 – LO: 08-10
KEYWORDS:
Bloom’s: Analyzing
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
225. Glitch Company incurred the following costs during 2016 and 2017:
a. Research and development costing $40,000 was conducted on a new product to sell in future years. A product was
successfully developed, and a patent for it was granted during 2016. Glitch is unsure of the period benefited by the
research, but believes the product will result in increased sales over the next five years.
b. Legal costs and application fees of $25,000 for the 20-year patent were incurred on January 1, 2016.
c. A patent infringement suit was successfully defended at a cost of $24,000. Assume that all costs were incurred on
January 1, 2017.
Required:
Determine how the costs in (a) and (b) should be presented on Glitch’s financial statements as of December 31, 2016.
Also determine the amount of amortization of intangible assets that Glitch should record in 2016 and 2017.
ANSWER:
a. All research and development costs should be treated as an expense. The 2016 income
statement should reflect an expense of $40,000.
b. Patent costs should be treated as an asset. The 2016 balance sheet should reflect a Patent
account of $25,000 – ($25,000/5 years) = $20,000.
c. The $24,000 cost of defending the patent should be added to the Patent account and
reflected in the 2017 balance sheet.
2016 amortization
= $25,000/5 years = $5,000
2017 amortization
= $25,000 – $5,000 amortization from 2016 + $24,000
infringement
= $44,000
$44,000/4 years
= $11,000 amortization for 2017
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.08-09 – LO: 08-09
FACC.PONO.13.08-10 – LO: 08-10
KEYWORDS:
Bloom’s: Analyzing
226. Several years ago, Laurel Company purchased a patent and has since been amortizing it on a straight-line basis over
its estimated useful life. The company’s comparative balance sheets contain the following items:
(In thousands)
December 31, 2017
December 31, 2016
Patent, less accumulated amortization of
$70,000 (2017) and $52,500 (2016)
$280,000
$297,500
A.
How much amortization expense was recorded during 2017?
B.
How is the amortization expense reported on the company’s statement of cash flows?
C.
How much was the original cost of the patent?
D.
How many years has the patent been amortized?
ANSWER:
A.
$70,000 – $52,500 = $17,500
B.
If the company uses the indirect method of reporting operating activities on the
statement of cash flows, the amount of amortization will be added in the operating
activities category. This is done because the expense was deducted in determining net
income, although no cash was used.
C.
$280,000 + $70,000 = $350,000
D.
$70,000/$17,500 per year = 4.0 years
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.08-09 – LO: 08-09
FACC.PONO.13.08-10 – LO: 08-10
KEYWORDS:
Bloom’s: Analyzing
Amortization expense
= $0
Patent amortization
= $75,000/10 years
= $ 7,500
Copyright amortization
= $96,000/20 years
= $ 4,800
Accumulated amortization
= $4,800 × 3 years
= $14,400
DIFFICULTY:
Easy
KEYWORDS:
Bloom’s: Analyzing
227. Racer Company acquired patent rights on January 1, 2013 for $1,080,000. The patent has a useful life equal to its
legal life of 15 years. On January 2, 2016, Racer successfully defended the patent in a lawsuit at a cost of $78,000.
Required:
(1)
Determine the patent amortization expense for the current year ended December 31, 2016.
(2)
Journalize the adjusting entry to recognize the amortization.
ANSWER:
(1)
($1,080,000/15) + ($78,000/12) = $78,500 total patent
expense
(2)
Amortization Expense—Patents
78,500
Patents
78,500
Amortized patent rights ($72,000 + $6,500).
Balance Sheet
Income Statement
Assets
=
Liabilities
+
Stockholders’
Equity
Revenues
–
Expenses
=
Net
Income
Amortized
Patent
Rights (78,500)
Amortization
Expense-
Patents
78,500
(78,500)
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.08-10 – LO: 08-10
KEYWORDS:
Bloom’s: Analyzing
228. For each of the following intangible assets, indicate the amount of amortization expense that should be recorded for
the year 2016 and the amount of accumulated amortization on the balance sheet as of December 31, 2016.
Trademark
Patent
Copyright
Cost
$66,000
$75,000
$96,000
Date of Purchase
1/1/09
1/1/11
1/1/14
Useful life
Indefinite
10 years
20 years
Legal life
Undefined
20 years
50 years
Method
Straight-line
Straight-line
Straight-line
ANSWER:
Trademark is not amortized because it has an indefinite life.
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
229. Fill in the table shown below indicating the period of time over which each intangible asset should be amortized, and
indicate the amount of amortization expense that should be reported for 2016.
Goodwill
Trademark
Cost
$80,000
$55,000
Date of purchase
June 30, 2016
January 1, 2016
Legal life
Forever
20 years
Useful life
60 years
10 years
2016 Amortization expense
ANSWER:
Goodwill = $ -0-
Trademark = $55,000/10 years = $5,500
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.08-10 – LO: 08-10
KEYWORDS:
Bloom’s: Analyzing
Chapter 8: Operating Assets: Property, Plant and Equipment, and Intangibles
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Hu Corporation
Use the following Assets section of Hu Corporation’s balance sheets for the years ended December 31, 2017 and 2016 to
answer the questions that follow.
HU CORPORATION
Assets Section of Consolidated Balance Sheets (in millions)
at December 31,
2017
2016
ASSETS
Current Assets
Cash and equivalents
$ 719
$2,610
Short-term investments
0
886
Receivables, less allowances of
6,054
464
Inventories
1,791
Prepaid expenses and other current assets
711
Total Current Assets
6,853
$ 440
Cable television equipment
$1,737
Less: Accumulated depreciation
12,684
1,041
Music catalogue, and copyrights
0
Cable television and sport franchises
0
10,684
Goodwill and other intangibles
713
578
Total assets