Chapter 12, Problem 5P

To determine

Journalize the given transaction.

Explanation of Solution

Amortization expense: The expense which reflects the usage of intangible asset by the way of reducing the cost of the asset for the estimated useful definite life, is referred to as amortization expense.

Formula for amortization expense:

$\text{Amortization expense}=\text{Cost of intangible asset}\text{×}\frac{1}{\text{Useful life}}$

Record the amortization expenses as on December 31, 2019 in a journal format:

Date	Account Title and Explanation	Post Ref	Debit ($)	Credit ($)
December 31, 2019	Amortization Expense –patent (1)		8,000
	Patent			8,000
	(To record the amortization expense of patent)

Table (1)

• An amortization expenses-Patent is an expense account and it is increased by $8,000. Expenses are the component of equity and it decreases the value of equity. Therefore, debit the amortization expenses account with $8,000.
• Patent is an asset, and it is decreased by $8,000. Therefore, credit patent with $8,000.

Working note (1):

Compute the amortization expenses:

$\begin{array}{c}\text{Amortization expenses}=\frac{\text{Patent}}{\left[\begin{array}{l}\text{Estimated Useful }\\ \text{Life of the patent}\end{array}\right]}\\ \text{=}\frac{\text{\$120,000}}{\text{15 years}}\\ \text{=}\text{\$8,000}\end{array}$

Record the amortization expenses as on December 31, 2019 in a journal format:

Date	Account Title and Explanation	Post Ref	Debit ($)	Credit ($)
December 31, 2019	Amortization Expense –Computer software (2)		45,000
	Computer software			45,000
	(To record the amortization expense of computer software)

Table (2)

• Amortization expenses-computer software is an expense account and it is increased by $45,000. Expenses are the component of equity and it decreases the value of equity. Therefore, debit amortization expenses account with $45,000.
• Computer software is an asset, and it is decreased by $45,000. Therefore, credit computer software with $45,000.

Working note (2):

Compute the amortization expenses:

$\begin{array}{c}\text{Amortization expenses}=\frac{\text{Patent}}{\left[\begin{array}{l}\text{Estimated Useful }\\ \text{Life of the patent}\end{array}\right]}\\ \text{=}\frac{\text{\$90,000}}{\text{2 years}}\\ \text{=}\text{\$45,000}\end{array}$

Record the decrease in retained earnings in a journal format:

Date	Account Title and Explanation	Post Ref	Debit ($)	Credit ($)
2019	Retained earnings		30,000
	Start-Up Costs			30,000
	(To record the decrease in retained earnings)

Table (3)

• Retained earnings are a component of stockholders’ equity and it decreases the value of equity. Hence, debit retained earnings account with $30,000.
• Start-up costs are an expense incurred by the business and it increases the value of stockholders’ equity. Therefore, credit start-up cost account with $30,000.

Record the additional paid-in-capital that was inappropriately capitalized in a journal format:

Date	Account Title and Explanation	Post Ref	Debit ($)	Credit ($)
2019	Additional Paid-in Capital		150,000
	Intellectual Capital			150,000
	(To record the increase in additional paid-in-capital)

Table (4)

• Additional Paid-in-capital is a component of stockholders’ equity and it decreases the value of equity. Hence, debit additional paid-in-capital with $150,000.
• Intellectual capital is a component of stockholders’ equity and it increases the value of equity. Hence, credit intellectual capital with $150,000.

Record the loss on impairment on goodwill and trade name in a journal format:

Date	Accounts Title and Explanation	Debit ($)	Credit ($)
	Impairment Loss-Trade name (3)	100,000
	Trademark		100,000
	(To record the impairment loss)

Table (5)

• Impairment loss is an expense account, and it decreases the value of equity. Hence, debit the impairment loss by $100,000.
• Trademark is an asset (Intangible) account and it is decreased. Therefore, credit trademark account with $100,000.

Working note (3):

Compute the impairment loss:

$\begin{array}{c}\text{Impairment loss = Fair value}-\text{Book value}\\ \text{=\$50,000}-\$150,000\\ =\$(100,000)\end{array}$

Date	Accounts Title and Explanation	Debit ($)	Credit ($)
	Impairment Loss-Goodwill (4)	70,000
	Goodwill		70,000
	(To record the impairment loss on goodwill)

Table (6)

• Impairment loss is an expense account, and it decreases the value of equity. Hence, debit the impairment loss by $70,000.
• Trademark is an asset (Intangible) account and it is decreased. Therefore, credit trademark account with $70,000.

Working note (4):

Compute the impairment loss:

$\begin{array}{c}\text{Impairment loss of goodwill}=\text{Fair value}-\text{Book value}\\ \text{=\$430,000}-\$500,000\\ =\$(70,000)\end{array}$