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Chapter 12: Q26. (page 610)
What is the fair value option?
The fair option value is a special type of option by which the companies report their financial instrument on the fair value.
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Use the information provided in BE12-1. Assume that at January 1, 2019, the carrying amount of the patent on Taylor Swift’s books is \(43,200. In January, Taylor Swift spends \)24,000 successfully defending a patent suit. Taylor Swift still feels the patent will be useful until the end of 2026. Prepare the journal entries to record the $24,000 expenditure and 2019 amortization.
On July 1, 2017, Wheeler Company purchased \(4,000,000 of Duggan Company’s 8% bonds, due on July 1, 2024. The bonds, which pay interest semiannually on January 1 and July 1, were purchased for \)3,500,000 to yield 10%. Determine the amount of interest revenue Wheeler should report on its income statement for the
year ended December 31, 2017.
What is the purpose of a fair value hedge?
Use the information from BE17-5 but assume the stock is nonmarketable. Prepare Fairbanks’ journal entries to record (a) the purchase of the investment, (b) the dividends received, and (c) the fair value adjustment, if any.
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.
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