Page 481 - Accounting Principles (A Business Perspective)

11. Plant asset disposals, natural resources, and intangible assets

a. The company purchased a patent in early January 2006 for USD 144,000 and began amortizing it over its
finite life of 10 years. In early January 2008, the company hired an outside law firm and successfully defended the
patent in an infringement suit at a cost of USD 38,400.

b. Research and development costs incurred in 2008 of USD 43,200 were expected to provide benefits over the
three succeeding years.
c. On 2009 January 2, the company rented space in a warehouse for five years at an annual fee of USD 9,600.
Rent for the first and last years was paid in advance.
d. A total of USD 96,000 was spent uniformly throughout 2009 by the company in promoting its lesser known
trademark, which is expected to have a finite useful life of 20 years.
e. In January 2007, the company purchased all of the assets and assumed all of the liabilities of another

company, paying USD 192,000 more than the fair market value of all identifiable assets acquired, less the liabilities
assumed. The company expects the cash flow benefits for which it paid the USD 192,000 to last 10 years (finite
useful life).
For each of these unrelated transactions, prepare journal entries to record only those entries (required for 2009.
Note any items that do not require an entry in 2009.
Beyond the numbers-Critical thinking

Business decision case A During your audit examination of the Shirley Company's Plant, Property, and
Equipment accounts, the following transaction came to your attention. On 2009 January 2, machine A was
exchanged for machine B. Shirley Company acquired machine A for USD 90,000 on 2007 January 2. Machine A
had an estimated useful life of four years and no salvage value, and the machine was depreciated on the straight-
line basis. Machine B had a cash price of USD 108,000. In addition to machine A, cash of USD 30,000 was given up
in the exchange. Machine B has an estimated useful life of five years and no salvage value, and the machine is being
depreciated using the straight-line method. The exchange has no commercial substance. Upon further analysis, you

discover that the company recorded the transaction as an exchange of nonmonetary assets having commercial
substance instead of one not having commercial substance. You must now determine the following:
a. What journal entry did the Shirley Company make when it recorded the exchange of machines? (Show
computations.)
b. What journal entry should the Shirley Company have made to record the exchange of machines?
c. Assume the error was discovered on 2010 December 31, before adjusting journal entries have been made.
What journal entries should be made to correct the accounting records? (Adjustments of prior years' net income
because of errors should be debited or credited to Retained Earnings.) What adjusting journal entry should be
made to record depreciation for 2010? (Ignore income taxes.)

d. What effect did the error have on reported net income for 2009? (Ignore income taxes.)
e. How should machine B be reported on the 2010 December 31, balance sheet?
Business decision case B Currently, many corporations are looking for acquisition opportunities. Tyre, Inc.,
is trying to decide whether to buy Amite Company or Beauman Company. Tyre, Inc., has hired you as a consultant
to analyze the two companies' financial information and to determine the more advantageous acquisition. Your
review of the companies' books has revealed that both Amite and Beauman have assets with the following book
values and fair market values:

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