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Chapter 12: Q19Q (page 610)
Hiram Co. uses the equity method to account for investments in common stock. What accounting should be made for dividends received from these investments subsequent to the date of investment?
Distribution of dividends to investors leads reduction in the equity investment account.
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Question: (Recording and Amortization of Intangibles) Marshall Company, organized in 2016, has set up a single account for all intangible assets. The following summary discloses the debit entries that have been recorded during 2017.
1/2/17 | Purchased patent (8-year life) | \( 350,000 |
4/1/17 | Purchase goodwill (indefinite life) | 360,000 |
7/1/17 | Purchased franchise with 10-year life; expiration date 7/1/27 | 450,000 |
8/1/17 | Payment of copyright (5-year life) | 156,000 |
9/1/17 | Research and development costs | 215,000 |
\)1,531,000 |
Instructions
Prepare the necessary entries to clear the Intangible Assets account and to set up separate accounts for distinct types of intangibles. Make the entries as of December 31, 2017, recording any necessary amortization and reflecting all balances accurately as of that date. (Use straight-line amortization.)
: As a new intern for the local branch office of a national brokerage firm, you are excited to get an assignment that allows you to use your accounting expertise. Your supervisor provides you with the spreadsheet below, which contains data for the most recent quarter for three companies that the firm has been recommending to its clients as “buys.” Each of the companies’ returns on assets has outperformed their industry cohorts in the past. But, given recent challenges in their markets, there is concern that the companies may experience operating challenges and lower earnings. (All numbers in millions, except return on assets.)
A | B | C | D | E |
Company | Fair Value of Company | Book Value (Net Assets) | Carrying Value of Goodwill | Return on Assets |
Sprint Nextel | \(36,361 | \)51,271 | $30,718 | 3.5% |
Washington Mutual | 11,742 | 23,941 | 9,062 | 2.4 |
E* Trade Financial | 1,639 | 4,104 | 2,035 | 5.6 |
Instructions
Hendricks Corporation purchased trading investment bonds for \(50,000 at par. On December 31, Hendricks received an annual interest of \)2,000, and the fair value of the bonds was $47,400. Prepare Hendricks’ journal entries for (a) the purchase of the investment, (b) the interest received, and (c) the fair value adjustment. (Assume a zero balance in the Fair Value Adjustment account.)
(Copyright Impairment) Presented below is information related to copyrights owned by Mare Company at December 31, 2017.
Cost | \(8,600,000 |
Carrying amount | 4,300,000 |
Expected future net cash flows | 4,000,000 |
Fair value | 3,200,000 |
Assume that Mare Company will continue to use this copyright in the future. As of December 31, 2017, the copyright is estimated to have a remaining useful life of 10 years.
Instructions
Hillsborough Co. has a held-to-maturity investment in the bonds of Schuyler Corp. with a carrying value of \(70,000. Hillsborough determined that due to poor economic prospects for Schuyler, the bonds have decreased in value to \)60,000. It is determined that this loss in value is uncollectible. Prepare the journal entry, if any, to record the reduction in value.
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