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Chapter 12: 12-12BE (page 638)

Question: Treasure Land Corporation incurred the following costs in 2017

Cost of laboratory research aimed at discovery of new knowledge

\(120,000

Cost of testing in search for product alternatives

\)100,000

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

\(210,000

\)430,000

Prepare the necessary 2017 journal entry or entries for Treasure Land.

Short Answer

Expert verified

Answer

Debiting R&D expense by $430,000 and crediting to cash account with the same amount.

Step by step solution

01

Meaning of R&D Expense

R&D costs are directly related to the research and development of a company's goods or services and any intellectual property created in the process. R&D costs are often incurred when a firm is looking for and developing new goods or services.

02

Journal Entry

Date

Particulars

Debit

Credit

Research and development Expense

$430,000

To Cash

$430,000

(Being entry made to record treasure land)

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Most popular questions from this chapter

Question: Briefly describe some of the similarities and differences between GAAP and IFRS with respect to the accounting for intangible assets.

The following is selected information for Alatorre Company.

1. Alatorre purchased a patent from Vania Co. for \(1,000,000 on January 1, 2015. The patent is being amortized over its remaining legal life of 10 years, expiring on January 1, 2025. During 2017, Alatorre determined that the economic benefits of the patent would not last longer than 6 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, 2017?

2. Alatorre bought a franchise from Alexander Co. on January 1, 2016, for \)400,000. The carrying amount of the franchise on Alexander’s books on January 1, 2016, was \(500,000. The franchise agreement had an estimated useful life of 30 years. Because Alatorre must enter a competitive bidding at the end of 2018, it is unlikely that the franchise will be retained beyond 2025. What amount should be amortized for the year ended December 31, 2017?

3. On January 1, 2017, Alatorre incurred organization costs of \)275,000. What amount of organization expense should be reported in 2017?

4. Alatorre purchased the license for distribution of a popular consumer product on January 1, 2017, for $150,000. It is expected that this product will generate cash flows for an indefinite period of time. The license has an initial term of 5 years but by paying a nominal fee, Alatorre can renew the license indefinitely for successive 5-year terms. What amount should be amortized for the year ended December 31, 2017?

Instructions:

Answer the questions asked about each of the factual situations.

Question: Your classmate Kate believes that the equity method is applied with a strict application of the “20%” rule. Do you agree? Explain.

(Accounting for Pre-Opening Costs) After securing lease commitments from several major stores, Auer Shopping Center, Inc. was organized and built a shopping center in a growing suburb.

The shopping center would have opened on schedule on January 1, 2017, if it had not been struck by a severe tornado in December. Instead, it opened for business on October 1, 2017. All of the additional construction costs that were incurred as a result of the tornado were covered by insurance.

In July 2016, in anticipation of the scheduled January opening, a permanent staff had been hired to promote the shopping center, obtain tenants for the uncommitted space, and manage the property.

A summary of some of the costs incurred in 2016 and the first nine months of 2017 follows.

2016

January 1, 2017, through September 30, 2017

Interest on mortgage bonds

\(720,000

\)540,000

Cost of obtaining tenants

300,000

360,000

Promotional advertising

540,000

557,000

The promotional advertising campaign was designed to familiarize shoppers with the center. Had it been known in time that the center would not open until October 2017, the 2016 expenditure for promotional advertising would not have been made. The advertising had to be repeated in 2017.

All of the tenants who had leased space in the shopping center at the time of the tornado accepted the October occupancy date on the condition that the monthly rental charges for the first 9 months of 2017 be canceled.

Instructions

Explain how each of the costs for 2016 and the first 9 months of 2017 should be treated in the accounts of the shopping center corporation. Give the reasons for each treatment.

Stave Company invests \(10,000,000 in 5% fixed rate corporate bonds on January 1, 2017. All the bonds are classified as available-for-sale and are purchased at par. At year-end, market interest rates have declined, and the fair value of the bonds is now \)10,600,000. Interest is paid on January 1. Prepare journal entries for Stave Company to (a) record the transactions related to these bonds in 2017, assuming Stave does not elect the fair option; and (b) record the transactions related to these bonds in 2017, assuming that Stave Company elects the fair value option to account for these bond.
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