Reichenbach Co., organized in 2009, has set up a single account for all intangib
ID: 2443877 • Letter: R
Question
Reichenbach Co., organized in 2009, has set up a single account for all intangible assets. The following summary discloses the debit entries that have been recorded during 2009 and 2010.Intangible Assets
7/1/09 8-year franchise; expiration date 6/30/17 $ 90,240
10/1/09 Advance payment on laboratory space (2-year lease) 45,120
12/31/09 Net loss for 2009 including state incorporation fee, $1,880,
and related legal fees of organizing, $9,400 (all fees
incurred in 2009) 30,080
1/2/10 Patent purchased (10-year life) 157,920
3/1/10 Cost of developing a secret formula (indefinite life) 141,000
4/1/10 Goodwill purchased (indefinite life) 523,392
6/1/10 Legal fee for successful defense of patent purchased above 13,570
9/1/10 Research and development costs 300,800
Prepare the necessary entries to clear the Intangible Assets account and to set up separate accounts for distinct types of intangibles. Make the entries as of December 31, 2010, recording any necessary amortization and reflecting all balances accurately as of that date. (Ignore income tax effects.) (List multiple debit/credit entries from largest to smallest amount, e.g. 10, 5, 2.)
Debit Credit
____________________________ _____________
____________________________ _____________
____________________________ _____________
____________________________ _____________
____________________________ _____________
____________________________ _____________
____________________________ _____________
Intangible Assets ____________
____________________________ _____________
____________________________ _____________
Franchises ____________
____________________________ _____________
____________________________ _____________
Prepaid Rent ____________
____________________________ _____________
Patents ____________
Explanation / Answer
I reviewed this material and I've provided a solution to it. Solutions Guide: Please reword the answers to essay type parts so as to guarantee that your answer is an original. Do not submit as is Reichenbach Co. organized in 2009, has set up a single account for all intangible assets. The following summary discloses the debit entries that have been recorded during 2009 and 2010. 7/1/09 8 year franchise; expiration date 6/30/17 48,000 10/01/09 Advance payment in laboratory space(2 year lease) 24,000 12/31/09 Net Loss for 2009 including statement incorporation fee, 1000, and related legal fees of organizing, $5000(all fees Occurred in 2009.) 16,000 1/2/2010 Patient purchased (10-year life) 84,000 3/1/2010 cost of developing a secret formula (indefinite life) 75,000 4/1/2010 Goodwill purchased (indefinite life) 278,400 6/1/2010 Legal fee for successful defense of patent purchased above 12,650 9/1/2010 Research and development costs 160,000 Prepare the necessary entries to clear the Intangibles Assets account and set up separate accounts for distinct types of intangibles. Make the entries as of December 31, 2010, recoding any necessary amortization and reflecting all balances accurately as of that date. Ignore income tax effects. Franchises 48,000 Prepaid Rent 24,000 Retained Earnings (Organization Costs of $6,000 in 2009) 6,000 Retained Earnings ($16,000 – $6,000) = 10,000 Patents ($84,000 + $12,650) = 96,650 Research and Development Expense ($75,000 + $160,000) 235,000 Goodwill 278,400 Intangible Assets 698,050 Franchise Amortization Expense ($48,000 ÷ 8) = 6,000 Retained Earnings ($48,000 ÷ 8 X 6/12) = 3,000 Franchises 9,000 Rent Expense ($24,000 ÷ 2) = 12,000 Retained Earnings ($24,000 ÷ 2 X 3/12) = 3,000 Prepaid Rent = 15,000 Patent Amortization Expense = 9,170 Patents = 9,170 ($84,000 ÷ 10) + ($12,650 X 7/115) Note: No amortization of goodwill; goodwill should be tested for impairment on at least an annual basis in future periods. CA12-2 After securing lease commitments from several major stores. Auer Shopping center inc. was organized and built a shopping center in a growing suburb. The shopping center would have opened on schedule on January 1, 2010, if it had not been struck by a severe tornado in December. Instead, it opened for business on October 1, 2010. All the additional construction costs that were incurred as a result of the tornado were covered by insurance. In July 2009, in anticipation of the scheduled January opening, a permanent staff had been hired to promote the shopping center, obtain tenants for the uncommitted space, and manage the property. A summary of some costs incurred in 2009 and the first nine months of 2010 follows. January 1, 2010 Through 2009 September 30, 2010 Interest on mortgage bonds 720,000 540,000 Cost of obtaining Tenants 300,000 360,000 Promotional Advertising 40,000 557,000 The promotional advertising campaign was designed to familiarize shoppers with the center, Had it been known in time that the center would not open until October 2010, the 2009 expenditure for promotional advertising would not have been made, The advertising had to be repeated in 2010. All of the tenants who had leased space in the shopping center at the time of the tornado accepted the October occupancy date on condition that the monthly rental charges for the first 9 months of 2010 be canceled. Explain how each of the costs for 2009 and the first 9 months of 2010 should be treated in the accounts of the shopping center corporation Give the reason for each treatment Interest on mortgage bonds. An amount equal to the interest cost incurred in 2009 ($720,000) is a cost which can be associated with the normal construction period and can be regarded as a normal element of the cost of the physical assets of the shopping center because the construction period would have ended at the end of the year if the tornado had not occurred. The decision to use debt capital to finance the shopping center was made with full knowledge that interest would accrue during the construction period and add to the total cost of building the center, bringing it to the point at which it would produce revenue. The future income to be generated by the shopping center must have been estimated to be more than sufficient to recover all of the expected costs of building the center and preparing it for occupancy, including interest during the construction period. In lieu of treating interest during construction as an element of the cost of the physical assets, it can be argued that it represents an element of the general cost of bringing the business to the point of revenue production and should therefore be treated as an organization expense. This view regards interest during construction as just another of the many expenditures that are necessary to acquire and organize the physical assets of a new business but do not attach to any specific assets. Note that interest must be capitalized in this situation (see chapter 10) because the building requires a period of time to get it ready for its intended use. The amount of interest cost for the first nine months of 2010 is the measure of the 2010 loss resulting from the tornado. The extension of the construction period to October 2010 because of the tornado does not warrant its capitalization as construction period interest. It is in effect an uninsured loss resulting from the tornado. Had it not been for the tornado, the entire amount would have been a normal operating expense chargeable against the rental revenue that would have been earned during the first nine months of 2010. Cost of obtaining tenants. Both the 2009 and 2010 costs of obtaining tenants should be expensed as incurred. The cost of obtaining tenants is a start-up cost. The accounting for start-up costs is straightforward—expense these costs as incurred. The profession recognizes that these costs are incurred with the expectation that future revenues will occur or increased efficiencies will result. However, to determine the amount and timing of future benefits is so difficult that a conservative approach—expense these costs as incurred—is required. Promotional advertising. The profession has concluded that, except in limited situations, future benefits from advertising are not sufficiently defined or measurable with a degree of reliability that is required to recognize these costs as an asset. As a result, the costs should be expensed as incurred or the first time the advertising takes place. The advertising costs incurred in 2010 might be reported as a loss to indicate that an unusual event caused this additional expense.