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Chapter 12: Q15E (page 643)

Question: (Accounting for Organization Costs) Angelou Corporation was organized in 2016 and began operations at the beginning of 2017. The company is involved in interior design consulting services. The following costs were incurred prior to the start of operations.

Attorney fees in connection with organization of the company

\(15,000

Purchase of drafting and design equipment

10,000

Costs of meetings of incorporators to discuss organizational activities

7,000

State filing fees to incorporate

1,000

\)33,000

Instructions

  1. Compute the total amount of organization costs incurred by Angelou.
  2. Prepare the journal entry to record organization costs for 2017.

Short Answer

Expert verified

Answer

  1. Total organization cost = $23,000
  2. Organization cost account should be debited, and the cash account should be credited.

Step by step solution

01

Meaning of Organization costs 

Organizational expenses are those expenses that are associated with the setup of a firm. The cost of a survey linked with an evaluation of possible markets, educating personnel in their new roles, and legal expenditures to form bylaws and articles of incorporation are some transactions that are included in organizational costs (for a corporation).

02

(a) Computation of the total amount of organization costs incurred by Angelou

Attorney’s fees in connection with the organization of the company

$15,000

Costs of meetings of incorporators to discuss organizational activities

7,000

State filing fees to incorporate

1,000

Total organization costs

$23,000

Drafting and design equipment, $10,000, should be classified as part of fixed assets rather than as organization costs.

03

(b) Preparing journal entries to record organization costs for 2017.

Date

Particular

Debit ($)

Credit ($)

Organization Expense

23,000

Cash (Payables)

23,000

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Most popular questions from this chapter

Question: Treasure Land Corporation incurred the following costs in 2017.

Cost of laboratory research aimed at the 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

Prototype testing subsequent to meeting economic viability

75,000

\)505,000

Prepare the necessary 2017 journal entry(ies) for Treasure Land.

What is the purpose of a cash flow hedge?

Question: (Accounting for Patents) On June 30, 2017, your client, Ferry Company, was granted two patents covering plastic cartons that it had been producing and marketing profitably for the past 3 years. One patent covers the manufacturing process, and the other covers the related products.

Ferry executives tell you that these patents represent the most significant breakthrough in the industry in the past 30 years. The products have been marketed under the registered trademarks Evertight, Duratainer, and Sealrite. Licenses under the patents have already been granted by your client to other manufacturers in the United States and abroad, and are producing substantial royalties.

On July 1, Ferry commenced patent infringement actions against several companies whose names you recognize as those of substantial and prominent competitors. Ferry’s management is optimistic that these suits will result in a permanent injunction against the manufacture and sale of the infringing products as well as collection of damages for loss of profits caused by the alleged infringement.

The financial vice president has suggested that the patents be recorded at the discounted value of expected net royalty receipts.

Instructions

  1. What is the meaning of “discounted value of expected net receipts”? Explain.
  2. How would such a value be calculated for net royalty receipts?
  3. What basis of valuation for Ferry’s patents would be generally accepted in accounting? Give supporting reasons for this basis.
  4. Assuming no practical problems of implementation and ignoring generally accepted accounting principles, what is the preferable basis of valuation for patents? Explain.
  5. What would be the preferable theoretical basis of amortization? Explain.
  6. What recognition, if any, should be made of the infringement litigation in the financial statements for the year ending September 30, 2017? Discuss.

Question: Indicate whether the following items are capitalized or expensed in the current year. (a) Purchase cost of a patent from a competitor. (c) Organizational costs. (b) Research and development costs. (d) Costs incurred internally to create goodwill.

(Investment Classifications)For the following investments, identify whether they are:

1. Trading debt securities.

2. Available-for-sale debt securities.

3. Held-to-maturity debt securities.

4. None of the above.

Each case is independent of the other.

(a) A bond that will mature in 4 years was bought 1 month ago when the price dropped. As soon as the value increases,

which is expected next month, it will be sold.

(b) 10% of the outstanding stock of Farm-Co was purchased. The company is planning on eventually getting a total of 30%

of its outstanding stock.

(c) Bonds were purchased in December of this year. The bonds are expected to be sold in January of next year.

(d) Bonds that will mature in 5 years are purchased. The company would like to hold them until they mature, but money

has been tight recently and they may need to be sold.

(e) Preferred stock was purchased for its constant dividend. The company is planning to hold the preferred stock for a long time.

(f) A bond that matures in 10 years was purchased. The company is investing money set aside for an expansion project

planned 10 years from now.
See all solutions

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