Larry Byrd, Inc.

, spent $111,320 in attorney fees while developing the trade name of its new product, the Mean Bean Machine.

Prepare the journal entries to 1) record the $111,320 expenditure and 2) the first year’s amortization, using an 11-year life. (Credit account
titles are automatically indented when amount is entered. Do not indent manually.)

No. Account Titles and Explanation Debit Credit

1.

2.

On September 1, 2012, Winans Corporation acquired Aumont Enterprises for a cash payment of $717,130. At the time of purchase, Aumont’s
balance sheet showed assets of $607,070, liabilities of $206,980, and owners’ equity of $400,090. The fair value of Aumont’s assets is
estimated to be $813,000.

Compute the amount of goodwill acquired by Winans.

$
Value assigned to
goodwill

Purchase price $717,130

Fair value of assets $813,000
Fair value of liabilities 206,980
Fair value of net assets 606,020
Value assigned to
$111,110
goodwill

Nieland Industries had one patent recorded on its books as of January 1, 2012. This patent had a book value of $342,360 and a remaining
useful life of 9 years. During 2012, Nieland incurred research and development costs of $116,430 and brought a patent infringement suit
against a competitor. On December 1, 2012, Nieland received the good news that its patent was valid and that its competitor could not use
the process Nieland had patented. The company incurred $110,580 to defend this patent. At what amount should patent(s) be reported on
the December 31, 2012, balance sheet, assuming monthly amortization of patents?

The amount to be
reported $
Carrying Life in Amortization Months
Amount Months Per Month Amortization
$342,36
Patent (1/1/12) 108 $3,170 12
0
Legal costs (12/1/12) 110,580 97 $1,140 1
$452,94
0
Carrying amount $452,940
Less:Amortization of patent (12 x $3,170) (38,040)
Legal costs amortization (1 x $1,140) (1,140)
$413,76
Carrying amount 12/31/12
0

Presented below is a list of items that could be included in the intangible assets section of the balance sheet.

Indicate which items on the list below would generally be reported as intangible assets in the balance sheet.

Reported as
1. Investment in a subsidiary company.
2. Timberland.

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

3.
manufacturing stage.

4. Lease prepayment (6 months’ rent paid in advance).

5. Cost of equipment obtained.

6. Cost of searching for applications of new research findings.

7. Costs incurred in the formation of a corporation.

8. Operating losses incurred in the start-up of a business.

9. Training costs incurred in start-up of new operation.

10
Purchase cost of a franchise.
.

11
Goodwill generated internally.
.

12
Cost of testing in search for product alternatives.
.

13
Goodwill acquired in the purchase of a business.
.

14
Cost of developing a patent.
.

15
Cost of purchasing a patent from an inventor.
.

16
Legal costs incurred in securing a patent.
.

17
Unrecovered costs of a successful legal suit to protect the patent.
.

18
Cost of conceptual formulation of possible product alternatives.
.

19
Cost of purchasing a copyright.
.

20
Research and development costs.
.

21
Long-term receivables.
.
22
Cost of developing a trademark.
.

23
Cost of purchasing a trademark.
.

Devon Harris Company has provided information on intangible assets as follows.

A patent was purchased from Bradtke Company for $2,707,000 on January 1, 2011. Harris estimated the remaining useful life of the patent
to be 10 years. The patent was carried in Bradtke’s accounting records at a net book value of $1,921,400 when Bradtke sold it to Harris.

During 2012, a franchise was purchased from Greene Company for $548,200. In addition, 5% of revenue from the franchise must be paid to
Greene. Revenue from the franchise for 2012 was $2,394,000. Harris estimates the useful life of the franchise to be 10 years and takes a full
year’s amortization in the year of purchase.

Harris incurred research and development costs in 2012 as follows.

Materials and equipment $141,300

Personnel 191,700
Indirect costs 103,800
$436,800

Harris estimates that these costs will be recouped by December 31, 2015. The materials and equipment purchased have no alternative uses.

On January 1, 2012, because of recent events in the field, Harris estimates that the remaining life of the patent purchased on January 1,
2011, is only 5 years from January 1, 2012.

(a) Prepare the intangibles section of harris's balance sheet at December 31, 2012.

DEVON HARRIS COMPANY

Balance Sheet (Partial)
December 31, 2012

(b) Compute the income statement effect for the year ended December 31, 2012 as a result of the facts above.

Total charged against

income $

Schedule 1 Computation of Patent from Bradtke

(a)
Company
$2,707,00
Cost of patent at date of purchase
0
=($2,707,000 ÷ 10 =
Amortization of patent for 2011 (270,700 )
years)

2,436,300

=($2,436,300 ÷ 5 =
Amortization of patent for 2012 (487,260 )
years)

$1,949,04
Patent balance
0
Schedule 2 Computation of Franchise from Greene
Company
Cost of franchise at date of purchase $548,200
Amortization of franchise for 2012 =($548,200 ÷ 10)= (54,820)
$493,38
Franchise balance
0
DEVON HARRIS COMPANY
Income Statement Effect
For the Year Ended December 31, 2012
Patent from Bradtke Company:
Amortization of patent for 2012 ($2,436,300 ÷ 5
$487,260
years)
Franchise from Greene Company:
Amortization of franchise for 2012 ($548,200 ÷ 10) $54,820
Payment to Greene Company ($2,394,000 x 5%) 119,700 174,520
Research and development costs 436,800
Total charged against income $1,098,580

Fred Graf, owner of Graf Interiors, is negotiating for the purchase of Terrell Galleries. The balance sheet of Terrell is given in an abbreviated
form below.

TERRELL GALLERIES
BALANCE SHEET
AS OF DECEMBER 31, 2012
Assets Liabilities and Stockholders’ Equity
Cash $100,490 Accounts payable $49,700
Land 70,610 Notes payable (long term) 302,060
Buildings (net) 204,100 Total liabilities 351,760
Equipment (net) 176,030 Common stock $235,500
Copyrights (net) 29,920 Retained earnings -6,110 229,390
Total assets $581,150 Total liabilities and stockholders’ equity $581,150

Graf and Terrell agree that:

1
Land is undervalued by $51,460.
.
2
Equipment is overvalued by $5,310.
.

Terrell agrees to sell the gallery to Graf for $381,180.

Prepare the entry to record the purchase of Terrell Galleries on Graf’s books. (Credit account titles are automatically indented when
amount is entered. Do not indent manually.)

Account Titles and Explanation Debit Credit

 ($581,150 – $229,39
Net assets of Terrell as reported
$351,760) 0
Adjustments to fair value
Increase in land value 51,460
Decrease in equipment value (5,310 ) 46,150
Net assets of Terrell at fair value 275,540
Selling price 381,180
Amount of goodwill to be $105,64
recorded 0

On July 31, 2012, Mexico Company paid $3,004,200 to acquire all of the common stock of Conchita Incorporated, which became a division of
Mexico. Conchita reported the following balance sheet at the time of the acquisition.

Current assets $860,000 Current liabilities $600,600

Noncurrent assets 2,735,400 Long-term liabilities 592,900
$3,595,40
Total assets Stockholders’ equity 2,401,900
0
Total liabilities and stockholders’ equity $3,595,400

It was determined at the date of the purchase that the fair value of the identifiable net assets of Conchita was $2,758,200. Over the next 6
months of operations, the newly purchased division experienced operating losses. In addition, it now appears that it will generate substantial
losses for the foreseeable future. At December 31, 2012, Conchita reports the following balance sheet information.

Current assets $457,600

Noncurrent assets (including goodwill recognized in purchase) 2,456,200
Current liabilities (729,500 )
Long-term liabilities (502,900 )
Net assets $1,681,400

It is determined that the fair value of the Conchita Division is $1,852,500. The recorded amount for Conchita’s net assets (excluding goodwill)
is the same as fair value, except for property, plant, and equipment, which has a fair value $154,800 above the carrying value.

(a) Compute the amount of goodwill recognized, if any, on July 31, 2012.

$
The amount of
goodwill

(b) Determine the impairment loss, if any, to be recorded on December 31, 2012.

$
The impairment
loss

(c) Assume that fair value of the Conchita Division is $1,629,900 instead of $1,852,500. Determine the impairment loss, if any, to be
recorded on December 31, 2012.

$
The impairment
loss

(d) Prepare the journal entry to record the impairment loss, if any, and indicate where the loss would be reported in the income statement.
(Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Account Titles and Explanation Debit Credit

This loss will be reported in income as a separate line item before the subtotal
.
Fair value of Conchita division $1,629,900
Carrying value of division $1,681,400
Increase in fair value of PP&E 154,800
Less: Goodwill 246,000
(1,590,200)
Implied fair value of goodwill 39,700
Carrying value of goodwill (246,000)
($206,30
Impairment loss )
0

Waterworld Company leased equipment from Costner Company. The lease term is 5 years and requires equal rental payments of $36,320 at
the beginning of each year. The equipment has a fair value at the inception of the lease of $149,000, an estimated useful life of 5 years, and
no salvage value. Waterworld pays all executory costs directly to third parties. The appropriate interest rate is 11%.

Prepare Waterworld’s January 1, 2012, journal entries at the inception of the lease. (Credit account titles are automatically indented
when amount is entered. Do not indent manually.)

Account Titles and Explanation Debit Credit

(To record the lease.)

(To record first lease payment.)

Assume that IBM leased equipment that was carried at a cost of $150,000 to Sharon Swander Company. The term of the lease is 6 years
beginning January 1, 2012, with equal rental payments of $30,044 at the beginning of each year. All executory costs are paid by Swander
directly to third parties. The fair value of the equipment at the inception of the lease is $150,000. The equipment has a useful life of 6 years
with no salvage value. The lease has an implicit interest rate of 8%, no bargain-purchase option, and no transfer of title. Collectibility is
reasonably assured with no additional cost to be incurred by IBM.

Prepare IBM’s January 1, 2012, journal entries at the inception of the lease. (Credit account titles are automatically indented when
amount is entered. Do not indent manually. Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the
final answer to 0 decimal places e.g. 58,971.)

Account Titles and Explanation Debit Credit

(To record the lease.)

(To record first lease payment.)

Indiana Jones Corporation enters into a 7-year lease of equipment on January 1, 2012, which requires 7 annual payments of $36,510 each,
beginning January 1, 2012. In addition, Indiana Jones guarantees the lessor a residual value of $20,530 at lease-end. The equipment has a
useful life of 7 years.

Prepare Indiana Jones’ January 1, 2012, journal entries assuming an interest rate of 12%. (Credit account titles are automatically
indented when amount is entered. Do not indent manually. Round present value factor calculations to 5 decimal places, e.g.
1.25124 and the final answer to 0 decimal places e.g. 58,971.)

Account Titles and Explanation Debit Credit

(To record the lease.)

(To record first lease payment.)

$36,510 x
Leased Equipment = PV of rentals $186,618
5.11141
PV of guar. $20,530 x
9,287
RV 0.45235
$195,905

On January 1, 2012, Adams Corporation signed a 7-year noncancelable lease for a machine. The terms of the lease called for Adams to
make annual payments of $9,214 at the beginning of each year, starting January 1, 2012. The machine has an estimated useful life of
8 years and a $5,480 unguaranteed residual value. The machine reverts back to the lessor at the end of the lease term. Adams uses
the straight-line method of depreciation for all of its plant assets. Adams’s incremental borrowing rate is 11%, and the lessor’s implicit
rate is unknown.

(b)

Compute the present value of

the minimum lease payments.
(Round present value factor
calculations to 5 decimal
places, e.g. 1.25124 and the
final answer to 0 decimal
places e.g. 58,971.)

The
present
value of $
the
minimum
lease
payments
 (c)

The parts of this question must be completed in order. This part will be available when you complete
the part above.

Wadkins Company, a machinery dealer, leased a machine to Romero Corporation on January 1, 2012. The lease is for an 8-year period
and requires equal annual payments of $40,897 at the beginning of each year. The first payment is received on January 1, 2012.
Wadkins had purchased the machine during 2011 for $172,000. Collectibility of lease payments is reasonably predictable, and no
important uncertainties surround the amount of costs yet to be incurred by Wadkins. Wadkins set the annual rental to ensure an 10%
rate of return. The machine has an economic life of 10 years with no residual value and reverts to Wadkins at the termination of the
lease.

(a)

Compute the amount of the lease receivable. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and
the final answer to 0 decimal places e.g. 58,971.)

$
The amount of the lease
receivable

b. The parts of this question must be completed in order. This part will be available when you complete the part above.

On February 20, 2012, Hooke Inc., purchased a machine for $1,206,000 for the purpose of leasing it. The machine is expected to have a 10-
year life, no residual value, and will be depreciated on the straight-line basis. The machine was leased to Sage Company on March 1, 2012,
for a 4-year period at a monthly rental of $13,200. There is no provision for the renewal of the lease or purchase of the machine by the lessee
at the expiration of the lease term. Hooke paid $30,096 of commissions associated with negotiating the lease in February 2012:

(a) What expense should Sage Company record as a result of the facts above for the year ended December 31, 2012?

$
Rent
Expense

(b) What income or loss before income taxes should Hooke record as a result of the facts above for the year ended December 31, 2012?
(Hint: Amortize commissions over the life of the lease.)

$
Income from lease before
taxes

SAGE COMPANY
Rent Expense
For the Year Ended December 31, 2012
Monthly rental $13,200
Lease period in 2013 (March–
x 10 months
December)
$132,000
HOOKE INC.
Income or Loss from Lease before Taxes
For the Year Ended December 31, 2012
Rental revenue ($15,600 x 10
$132,000
months)
Less expense
Depreciation $100,500*
Commission 6,270** 106,770
Income from lease before taxes $25,230
*$1,206,000 cost ÷ 10 years=$120,600/year
$120,600 x 10/12 =$100,500
The following facts pertain to a noncancelable lease agreement between Alschuler Leasing Company and McKee Electronics, a lessee, for a
computer system.

Inception date October 1, 2012

Lease term 6 years
Economic life of leased equipment 6 years
Fair value of asset at October 1, 2012 $317,912
Residual value at end of lease term –0–
Lessor’s implicit rate 11 %
Lessee’s incremental borrowing rate 11 %
Annual lease payment due at the beginning of
each year, beginning with October 1, 2012 $67,700

The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be
incurred by the lessor. The lessee assumes responsibility for all executory costs, which amount to $5,220 per year and are to be paid each
October 1, beginning October 1, 2012. (This $5,220 is not included in the rental payment of $67,700.) The asset will revert to the lessor at
the end of the lease term. The straight-line depreciation method is used for all equipment.

The following amortization schedule has been prepared correctly for use by both the lessor and the lessee in accounting for this lease. The
lease is to be accounted for properly as a capital lease by the lessee and as a direct-financing lease by the lessor.

Annual Lease Interest (11%) on

Reduction of Lease Balance of Lease
Date Payment/Receip Unpaid
Liability/Receivable Liability/Receivable
t Liability/Receivable
10/01/1
$317,912
2
10/01/1
$ 67,700 $67,700 250,212
2
10/01/1
67,700 $27,523 40,177 210,035
3
10/01/1
67,700 23,104 44,596 165,439
4
10/01/1
67,700 18,198 49,502 115,937
5
10/01/1
67,700 12,753 54,947 60,990
6
10/01/1
67,700 6,710 60,990 –0–
7
$406,200 $88,288 $317,912

(a) Assuming the lessor’s accounting period ends on September 30, answer the following questions with respect to this lease agreement.
(Round answers to 0 decimal places e.g. 58,971.)

(1) What items and amounts will appear on the lessor’s income statement for the year ending September 30, 2013?

(2) What items and amounts will appear on the lessor’s balance sheet at September 30, 2013?

Balance Sheet (Partial)

September 30, 2013
Current Assets
$

Noncurrent Assets
$
(3) What items and amounts will appear on the lessor’s income statement for the year ending September 30, 2014?

(4) What items and amounts will appear on the lessor’s balance sheet at September 30, 2014?

Balance Sheet (Partial)

September 30, 2014
Current Assets
$

Noncurrent Assets
$

(b) Assuming the lessor’s accounting period ends on December 31, answer the following questions with respect to this lease agreement.
(Round answers to 0 decimal places e.g. 58,971.)

(1) What items and amounts will appear on the lessor’s income statement for the year ending December 31, 2012?

(2) What items and amounts will appear on the lessor’s balance sheet at December 31, 2012?

Balance Sheet (Partial)

December 31, 2012
Current Assets
$

Noncurrent Assets
$

(3) What items and amounts will appear on the lessor’s income statement for the year ending December 31, 2013?

(4) What items and amounts will appear on the lessor’s balance sheet at December 31, 2013?

Balance Sheet (Partial)

December 31, 2013
Current Assets
$

Noncurrent Assets
$

(b) (1) Interest revenue = ($27,523 x 3/12) = $6,881

[($27,523 – $6,881) + ($23,104 x

(3) Interest revenue = = $26,418
3/12) = [$20,642 + $5,776]