Chapter 12, Problem 12E

1.

To determine

Prepare necessary journal entries to record the given transaction of Company B.

Explanation of Solution

Patent: Patent is a right that is exclusively granted by the Government to an individual or firm to process or design, to make, use or sell its invention for a limited period. It protects the right of the inventor from doing so by any other individual till the granted period expires.

Trademark: It is an exclusive right of an entity or business to display its identity of the products or goods through a registered word, symbol, or emblem.

Copyright: Copyright is the legal right granted to the writers, musicians, artists, and owners to recreate, or develop their original work. In simple words, it is right to copy by the authors.

Prepare necessary journal entries to record the given transaction of Company B as follows:

a. Patent purchased for $70,000.

Date	Accounting Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Patent		70,000
	Cash			70,000
	(To record the purchase of patent)

Table (1)

• A Patent is an asset account and it is increased. Therefore, debit patents account with $70,000.
• Cash is an asset account and it is decreased. Therefore, credit cash account with $70,000.

b. Novel rights purchased by a best-selling novelist.

Date	Accounting Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Copyrights $\left(\text{10,000 shares }\times \text{ 60 per share}\right)$		600,000
	Common stock, $10 par			100,000
	Additional paid in capital			500,000
	(To record the purchase of copyrights)

Table (2)

• Copyright is an asset account and it is increased. Therefore, debit copyright account with $600,000.
• Common stock is a component of stockholder’s equity and it is increased. Therefore, credit the common stock with $100,000.
• Additional paid in capital is a component of stockholder’s equity and it is increased. Therefore, credit the common stock with $500,000.

c. Acquisition of franchise.

Date	Accounting Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Franchise		10,000
	Cash			10,000
	(To record the acquisition of franchise)

Table (3)

• Franchise is an asset account and it is increased. Therefore, debit franchise account with $10,000.
• Cash is an asset account and it is decreased. Therefore, credit cash account with $10,000.

d. Legal cost paid for patent.

Date	Accounting Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Patent		28,000
	Cash			28,000
	(To record the legal fees paid for patent)

Table (4)

• A Patent is an asset account and it is increased. Therefore, debit patents account with $28,000.
• Cash is an asset account and it is decreased. Therefore, credit cash account with $28,000.

e. Advertising expense paid in advance.

Date	Accounting Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Prepaid advertising		50,000
	Cash			50,000
	(To record the advertising expense paid in advance)

Table (5)

• Prepaid advertising is an asset account and it is increased. Therefore, debit prepaid advertising account with $50,000.
• Cash is an asset account and it is decreased. Therefore, credit cash account with $50,000.

2.

To determine

Prepare journal entries to record the amortization expense of intangible assets of Company B for 2016 and identify the amortization method which is more appropriate.

Explanation of Solution

Prepare journal entries to record the amortization expense of intangible assets of Company B for 2016 as follows:

a. Amortization expense of patent.

Patent should be amortized over its legal life, because the legal life of the patent is 20 years as per GAAP.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
December 31, 2016	Amortization expense (1)		7,000
	Patent			7,000
	(To record the amortization expense incurred)

Table (6)

• Amortization expense is component of shareholders’ equity, and it decreases the value of shareholders equity. Hence, debit the amortization expense with $7,000.
• Patent is an asset account, and it decreases the value of asset. Hence, credit the patent account with $7,000.

Working note (1):

Calculate the amortization expense of patent.

$\begin{array}{c}\text{Amortization expnes = }\frac{\left(\begin{array}{l}\text{Purchase price of patent +}\\ \text{Legal fees paid for patent}\end{array}\right)}{\left(\begin{array}{l}\text{20 years }-\\ \text{Number of years form 2010 to 2016}\end{array}\right)}\\ =\frac{\$70,000+\$28,000}{\left(\text{20 years}-6\text{ years}\right)}\\ =\$7,000\end{array}$

b. Amortization expense of copyrights.

Copyright should be amortized based on the straight line method, because the pattern of consumption or use of economic benefit is not provided.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
December 31, 2016	Amortization expense (2)		200,000
	Copyrights			200,000
	(To record the amortization expense incurred)

Table (7)

• Amortization expense is component of shareholders’ equity, and it decreases the value of shareholders equity. Hence, debit the amortization expense with $200,000.
• Copyright is an asset account, and it decreases the value of asset. Hence, credit the copyright account with $200,000.

Working note (2):

Calculate the amortization expense of copyright.

$\begin{array}{c}\text{Amortization expnes = }\frac{\text{Fair value of copyright}}{\text{Useful life}}\\ =\frac{\$600,0000}{3\text{ years}}\\ =\$200,000\end{array}$

c. Amortization expense of franchise.

Franchise should be amortized over its legal life, because the franchise is 5 years (given).

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
December 31, 2016	Amortization expense (3)		2,000
	Franchise			2,000
	(To record the amortization expense incurred)

Table (8)

• Amortization expense is component of shareholders’ equity, and it decreases the value of shareholders equity. Hence, debit the amortization expense with $2,000.
• Franchise is an asset account, and it decreases the value of asset. Hence, credit the franchise account with $2,000.

Working note (3):

Calculate the amortization expense of franchise.

$\begin{array}{c}\text{Amortization expnes = }\frac{\text{Fair value of franchise}}{\text{Useful life}}\\ =\frac{\$10,0000}{\text{5 years}}\\ =\$2,000\end{array}$

d. Amortization expense of patent.

The amortization of legal costs of the patent is included in transaction a.

e. Advertising expense incurred during the year.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
December 31, 2016	Advertising expense (4)		25,000
	Prepaid advertising			25,000
	(To record the advertising expense incurred at the end of the year)

Table (9)

• Advertising expense is component of shareholders’ equity, and it decreases the value of shareholders equity. Hence, debit the advertising expense with $25,000.
• Prepaid advertising is an asset account, and it decreases the value of asset. Hence, credit the prepaid advertising account with $25,000.

Working note (4):

Calculate the advertising expense.

$\begin{array}{c}\text{Advertising expnes = }\frac{\text{Total advertising expense}}{\text{Advertising used for 2 years}}\\ =\frac{\$50,0000}{\text{2 years}}\\ =\$25,000\end{array}$