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Chapter 12: Q32. (page 610)
Why might a company become involved in an interest rate swap contract to receive fixed interest payments and pay variable?
A company might enter into the contract of the interest rate swap contract to set off the fixed payment of the debt obligation against the fixed payment swap.
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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.
Joni Hyde Inc. has the following amounts reported in its general ledger at the end of the current year.
Organization costs $24,000
Trademarks 15,000
Discount on bonds payable 35,000
Deposits with advertising agency for ads to promote goodwill of company 10,000
Excess of cost over fair value of net identifiable assets of acquired subsidiary 75,000
Cost of equipment acquired for research and development projects; the equipment has an alternative future use 90,000
Costs of developing a secret formula for a product that is expected to be marketed for at least 20 years 80,000
Instructions
(a) On the basis of the information above, compute the total amount to be reported by Hyde for intangible assets on its balance sheet at year-end.
(b) If an item is not to be included in intangible assets, explain its proper treatment for reporting purposes.
Question: As the recently appointed auditor for Bryan Corporation, you have been asked to examine selected accounts before the 6-month financial statements of June 30, 2017, are prepared. The controller for Bryan Corporation mentions that only one account is kept for intangible assets. The account is shown below.
Intangible assets | ||||
Debit | Credit | Balance | ||
Jan. 4 | Research and development costs | 940,000 | 940,000 | |
Jan. 5 | Legal costs to obtain patent | 75,000 | 1,015,000 | |
Jan. 31 | Payment of 7 months’ rent on property leased by Bryan | 91,000 | 1,106,000 | |
Feb. 11 | Premium on common stock | 250,000 | 856,000 | |
March 31 | Unamortized bond discount on bonds due March 31, 2037 | 84,000 | 940,000 | |
April 30 | Promotional expenses related to start-up of business | 207,000 | 1,147,000 | |
June 30 | Operating losses for first 6 months | 241,000 | 1,388,000 |
Instructions
Prepare the entry or entries necessary to correct this account. Assume that the patent has a useful life of 10 years.
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.)
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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