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The intangible assets section of the balance sheet Essay

E12-1 (Classification Issues—Intangibles) Presented below is a list of items that could be included in the intangible assets section of the balance sheet.


(a)Indicate which items on the list above would generally be reported as intangible assets in the balance sheet.
13.Goodwill acquired in the purchase of a business.
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. 23.Cost of purchasing a trademark
19.Cost of purchasing a copyright.
10.Purchase cost of a franchise.
(b)Indicate how, if at all, the items not reportable as intangible assets would be reported in the financial statements. 1.Investment in a subsidiary company. – long term investments 2.Timberland. – PPE

3.Cost of engineering activity required to advance the design of a product to the manufacturing stage. – research and development

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

5.Cost of equipment obtained. – PPE

6.Cost of searching for applications of new research findings. – R&D expense

7.Costs incurred in the formation of a corporation. – expense

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

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

11.Goodwill generated internally. – not recorded

12.Cost of testing in search for product alternatives. – R&D expense 14.Cost of developing a patent. – R&D expense

18.Cost of conceptual formulation of possible product alternatives.

20.Research and development costs. – R&D expense

21.Long-term receivables. – long term investment

22.Cost of developing a trademark. – expense

(Kieso, 02/201
1, p. 698)

E12-4 (Intangible Amortization) Presented below is selected information for Palmiero Company. 1.Palmiero purchased a patent from Vania Co. for $1,500,000 on January 1, 2010. The patent is being amortized over its remaining legal life of 10 years, expiring on January 1, 2020. During 2012, Palmiero 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, 2012? 2010


Amortization Expense 250,000
Accumulated Patent Amortization 250,000

2.Palmiero bought a franchise from Dougherty Co. on January 1, 2011, for $350,000. The carrying amount of the franchise on Dougherty’s books on January 1, 2011, was $500,000. The franchise agreement had an estimated useful life of 30 years. Because Palmiero must enter a competitive bidding at the end of 2020, it is unlikely that the franchise will be retained beyond 2020. What amount should be amortized for the year ended December 31, 2012?

1,350,000/6 = 225,000 for Dec 2012

Book value $500,000.

3.On January 1, 2010, Palmiero incurred organization costs of $275,000. What amount of organization expense should be reported in 2012? a.Expense startup costs as incurred

4.Palmiero purchased the license for distribution of a popular consumer product on January 1, 2012, 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, Palmiero can renew the license indefinitely for successive 5-year terms. What amount should be amortized for the year ended December 31, 2012? a.zero


Answer the questions asked about each of the factual situations. E12-5 (Correct Intangible Asset Account) As the recently appointed auditor for Hillary Corporation, you have been asked to examine selected accounts before the 6-month financial statements of June 30, 2012, are prepared. The controller for Hillary Corporation mentions that only one account is kept for intangible assets.

Intangible Assets
AssetsLiabilties and Stockholders equity
4-JanResearch and development cost940,000
5-Janlegal costs to obtain patent75,00011-FebPrem on common stock250,000 31-Janpayment of 7mt rent on property leased by hillary91,00031-MarUnamortized bond discount on bonds due march 31, 203284,000 30-Aprpromtional expenses related to startup of business207,000 30-Junoperatiing losses for first 6mth 141,000


Prepare the entry or entries necessary to correct this account. Assume that the patent has a useful life of 12 years. E12-12 (Accounting for Goodwill) 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. Prepare the entry to record the purchase of Terrell Galleries on Graf’s books.

E12-16 (Accounting for R&D Costs) Margaret Avery Company from time to time embarks on a research program when a special project seems to offer possibilities. In 2011, the company expends $325,000 on a research project, but by the end of 2011 it is impossible to determine whether any benefit will be derived from it. Instructions

(a)What account should be charged for the $325,000, and how should it be shown in the financial statements? a.Carry as inventory and allocate as consumed

(b)The project is completed in 2012, and a successful patent is obtained. The R&D costs to complete the project are $130,000. The administrative and legal expenses incurred in obtaining patent number 472-1001-84 in 2012 total $24,000. The patent has an expected useful life of 5 years. Record these costs in journal entry form. Also, record patent amortization (full year) in 2012

Research and development

Administrative and legal expenses
Patent 472-1001-8424,000

Aggregate Amortization Expense
Year 201224,000
Estimated Amortization Expense
Year 201319,200
Year 201414,400
Year 20159,600
Year 20164,800

(c)In 2013, the company successfully defends the patent in extended litigation at a cost of $47,200, thereby extending the patent life to December 31, 2020. What is the proper way to account for this cost? Also, record patent amortization (full year) in 2013.

Aggregate Amortization Expense
Year 201347,200

(d)Additional engineering and consulting costs incurred in 2013 required to advance the design of a product to the manufacturing stage total $60,000. These costs enhance the design of the product considerably. Discuss the proper accounting treatment for this cost. Engineering cost used to advance the design are expensed immediately as development cost in R&D.

Kieso, D. E. (02/2011). Intermediate Accounting, 14th Edition [VitalSource Bookshelf version]. Retrieved from http://online.vitalsource.com/books/9781118233641 The citation provided is a guideline. Please check each citation for accuracy before use.

E13-1 (Balance Sheet Classification of Various Liabilities) How would each of the following items be reported on the balance sheet? (a)Accrued vacation pay.
(b)Estimated taxes payable.
(c)Service warranties on appliance sales.
(d)Bank overdraft.
(e)Personal injury claim pending.
(f)Unpaid bonus to officers.
(g)Deposit received from customer to guarantee performance of a contract. (h)Sales taxes payable.
(i)Gift certificates sold to customers but not yet redeemed. (j)Premium offers outstanding.
(k)Discount on notes payable.
(l)Employee payroll deductions unremitted.
(m)Current maturities of long-term debts to be paid from current assets. (n)Cash dividends declared but unpaid.
(o)Dividends in arrears on preferred stock.
(p)Loans from officers.

E13-2 (Accounts and Notes Payable) The following are selected 2012 transactions of Darby Corporation. Sept. 1
Purchased inventory from Orion Company on account for $50,000. Darby records
purchases gross and uses a periodic inventory system. Oct. 1
Issued a $50,000, 12-month, 8% note to Orion in payment of account. Oct. 1
Borrowed $75,000 from the Shore Bank by signing a 12-month, zero-interest-bearing $81,000 note.

(a)Prepare journal entries for the selected transactions above. (b)Prepare adjusting entries at December 31.
(c)Compute the total net liability to be reported on the December 31 balance sheet for: (1)The interest-bearing note.
(2)The zero-interest-bearing note.

E13-3 (Refinancing of Short-Term Debt) On December 31, 2012, Alexander Company had $1,200,000 of short-term debt in the form of notes payable due February 2, 2013. On January 21, 2013, the company issued 25,000 shares of its common stock for $36 per share, receiving $900,000 proceeds after brokerage fees and other costs of issuance. On February 2, 2013, the proceeds from the stock sale, supplemented by an additional $300,000 cash, are used to liquidate the $1,200,000 debt. The December 31, 2012, balance sheet is issued on February 23, 2013.


Show how the $1,200,000 of short-term debt should be presented on the December 31, 2012, balance sheet, including note disclosure.

E13-8 (Payroll Tax Entries) The payroll of Delaney Company for September 2012 is as follows. Total payroll was $480,000, of which $140,000 is exempt from Social Security tax because it represented amounts paid in excess of $106,800 to certain employees. The amount paid to employees in excess of $7,000 was $410,000. Income taxes in the amount of $80,000 were withheld, as was $9,000 in union dues. The state unemployment tax is 3.5%, but Delaney Company is allowed a credit of 2.3% by the state for its unemployment experience. Also, assume that the current FICA tax is 7.65% on an employee’s wages to $106,800 and 1.45% in excess of $106,800. No employee for Delaney makes more than $125,000. The federal unemployment tax rate is 0.8% after state credit.


Prepare the necessary journal entries if the wages and salaries paid and the employer payroll taxes are recorded separately.

E13-13 (Contingencies) Presented below are three independent situations.
Answer the question at the end of each situation. 1.During 2012, Maverick Inc. became involved in a tax dispute with the IRS. Maverick’s attorneys have indicated that they believe it is probable that Maverick will lose this dispute. They also believe that Maverick will have to pay the IRS between $800,000 and $1,400,000. After the 2012 financial statements were issued, the case was settled with the IRS for $1,200,000. What amount, if any, should be reported as a liability for this contingency as of December 31, 2012? 2.On October 1, 2012, Holmgren Chemical was identified as a potentially responsible party by the Environmental Protection Agency. Holmgren’s management along with its counsel have concluded that it is probable that Holmgren will be responsible for damages, and a reasonable estimate of these damages is $6,000,000.

Holmgren’s insurance policy of $9,000,000 has a deductible clause of $500,000. How should Holmgren Chemical report this information in its financial statements at December 31, 2012? 3.Shinobi Inc. had a manufacturing plant in Darfur, which was destroyed in the civil war. It is not certain who will compensate Shinobi for this destruction, but Shinobi has been assured by governmental officials that it will receive a definite amount for this plant. The amount of the compensation will be less than the fair value of the plant but more than its book value. How should the contingency be reported in the financial statements of Shinobi Inc.?

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