Free solutions manual intermediate accounting 12th edition

These costs are referred to as start-up costs, or more specifically organizational costs in this case. 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—expensing these costs as incurred—is required.

There are 30 40 — 10 remaining years for amortization purposes. No entry is necessary. The loss is the difference between the recorded goodwill and the implied goodwill. Becausethe usefullife is indefinite, copyrightNo. Long-term investments in the balancesheet. Property,plant,and equipmentin the balance sheet. Researchand developmentexpense in the income statement.

Currentasset prepaidrent in the balance sheet. Charge asexpensein the income statement. Operatinglosses in the income statement. Not recorded; any costs relatedto creating goodwillincurred internally mustbe expensed. Long-term investments,or other assets,in the balance sheet. Expensedin the income statement. EXERCISE 10—15 minutes The following items would be classified as an intangible asset: Cable television franchises Film contractrights Music copyrights Customerlists Goodwill Covenants notto compete Internetdomain name Brand names Cash, accounts receivable, notes receivable, and prepaid expenses would be classified as current assets.

Property,plant,and equipment,and land would be classified as non-current assets in the property, plant, and equipment section. Research and development costs would be classified as an operating expense. Discount on notes payable is shown as a deduction from the related notes payable on the balance sheet. Organizationcosts are start-up costs and should be expensed as incurred. Advertising costs in general are expensed when incurred or when first used.

The computation of accumulated amortization is as follows. Alatorre should amortize the franchise over its estimated useful life. Becauseitis uncertainthatAlatorrewillbe able to retainthe franchiseat the end of , it should be amortized over 10 years. These costs should be expensed as incurred. Because the license can be easily renewed atnominalcost , it has an indefinite life.

Thus, no amortization will be recorded. The license will be tested for impairment in future periods. Restoration of any impairment loss is not permitted for assets held for use. Therefore,an impairmenthasoccurred. Todeterminethe impair- ment amount, we first find the implied goodwill.

We then compare this implied fair value to the carrying value of the goodwill to determine the amount of the impairment to record. After a goodwillimpairmentloss is recognized,the adjusted carrying amount of the goodwill is its new accounting basis.

Note to instructor:It is importantthat before conductingthe goodwill impairmenttest that all other long-lived assets are evaluated and adjusted for any impairments. Payable, etc The student must also be alert to the fact that several transactions require that an adjustment of Retained Earnings be made. The problem provides a good summary of accounting for intangibles. Problem Time 20—30 minutes Purpose—to provide the student with an opportunity to compute the carrying value of a patent at three balance sheet dates.

Computation of amortization is slightly complicated by additions to the account and a change in the estimated useful life of the patents. Problem Time 20—30 minutes Purpose—the student determines the cost and amortization of a franchise, patent, and trademark and shows how they are disclosed on the balance sheet.

The student prepares a schedule of expenses resulting from the intangibles transactions. Problem Time 15—20 minutes Purpose—to provide the student with an opportunity to determine income statement and balance sheet presentation for costs related to research and development of patents.

The problem calls on the student to determine whether costs incurred are properly capitalized or expensed.

Problem Time 25—30 minutes Purpose—to provide the student with an opportunity to determine the amount of goodwill in a business combination and to determine the goodwill impairment. Problem Time 30—35 minutes Purpose—to provide the student with an opportunity to determine carrying value of intangible assets limited life, indefinite life, and goodwill at two balance sheet dates.

The problem also requires students to determine impairments, if necessary on the intangible assets. The patentwas acquired for manufacturing rights rather than for usein research and development activities. Consequently, the cost of the patentcan be capitalizedas an intangible assetand amortized over its useful life.

There is no amor- tization for the goodwill or the trade name, both of which are considered indefinite life intangible assets. Thereis no amortization for the goodwill or the trade name, which are considered an indefinite life intangibles. The student is required to deal with such issues as costs incurred for interest expense during construction, the cost of promotional advertising, and expenditures related to obtaining tenants for a shopping center.

Classification of these items is complicated due to a postponement in the starting of business operations. A challenging and interesting case which should provide good background for a discussion of the theoretical support for capitalizing organization costs. CA Time 25—30 minutes Purpose—to present an opportunity for the student to discuss accounting for patents from a theoretical and a practical viewpoint.

The student is also required to commenton the theoretical basis of patent amortization. Finally the student must determine proper disclosure in the financial statements for a patent infringement suit which is in progress at the balance sheet date.

This casechallenges the student to present theoretical support and practical application beyond that presented in the text. A good case to thoroughly cover research and development costs. CA Time 20—25 minutes Purpose—to provide the student with an opportunity to examine the ethical issues related to expensing research and development costs. 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 is the measure of the loss resulting from the tornado. The extension of the construction period to October 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 Cost of obtaining tenants. Both the and costs of obtaining tenants should be expensed as incurred. The cost of obtaining tenants is a start-up cost.

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 might be reported as a loss to indicate that an unusual event caused this additional expense. CA a A dollar to be received in the future is worth less than a dollar received today because of an interest or discount factor—often referred to as the time value of money.

The discounted value of the expected royalty receipts can be thought of either in terms of the present value of an annuity of 1 or in terms of the sum of several present values of 1. On the other hand, if receipts are expected to be irregular in amount or if they are to occur at irregular In each case some interest rate discount factor per period must be assumed and used.

Evidently the cartons were developed and the patents obtained directly by the client corporation. Those costs related to the research and development of the cartons must be expensed in accordance with GAAP. The costs of securing the patent should be capitalized. If the infringement suit is unsuccessful, an evaluation of the value of the patent should be made to ascertain the reasonableness of carrying forward the patent cost. The ideal measure of the value of intangible assets is the discounted present value of their future benefits.

Other valuation bases that have been suggested are current cashequivalent or fair market value. As the benefits are received by the firm, the cost or other value should be charged to expense or to inventory to provide a proper matching of revenues and expenses.

Under the discounted value approach, the periodic amortization would be the decline during the year in the present value of expected net receipts. In practice, generally straight-line amortization is used because it is simple and provides a uniform amortization approach.

Another approach would be the units-of-production method. Some indication of the expectations of legal counsel in respect to the outcome can properly accompany the statements. It would be inappropriate to record a contingent asset reflecting the expected damages to be recovered. Costs incurred to September 30, , in connection with the litigation should be carried forward and charged to expense or to loss if the cases are lost as royalties or damages are collected from the parties against whom the litigation has been instituted; however, the conventional treatment would be to charge these costs as ordinary legal expenses.

If the final outcome of the litigation is successful, the costs of prosecuting it should be capitalized. Similarly, if the client were the successfuldefendant in an infringement suit on these patents, the generally accepted accounting practice would be to add the costs of the legal defense to the Patents account. CA Continued The FASB considered four alternative methods of accounting: 1 charge all costs to expense when incurred, 2 capitalize all costs when incurred, 3 selective capitalization, and 4 accumulate all costs in a special category until the existence of future benefits can be determined.

The FASB concluded that all research and development costs should be charged to expense as incurred. Accounting for the costs of research and development activities conducted for others under a contractual arrangement is a part of accounting for contracts in general and is addressed in other literature See FASB ASC 5.

In reaching this decision, the FASB considered the three pervasive principles of expense recognition: 1 associating cause and effect, 2 systematic and rational allocation, and 3 immediate recognition.

The FASB found little or no evidence of a direct causal relationship between current research and development expenditures and subsequent future benefits.

The FASB also stated that the high degree of uncertainty surrounding future benefits, if any, of individual research and development projects make it doubtful that there is any useful purpose to be served by capitalizing the costs and allocating them over future periods. The high degree of uncertainty about whether research and development expenditures will provide any future benefits, the lack of objectivity in setting criteria, and the lack of usefulness of the resulting information led the FASB to reject the alternatives of capitalization, selective capitalization, and accumulation of costs in a special category.

Prototype manufacturing costs. Administrative costs related solely to research and development. The depreciation expense resulting from the current year is a part of research and development expense for the year. The market research direct costs and related administrative expenses are not research and development costs.

These costs are treated as period costs and are shown as expense items in the current income statement. Reid must be concerned with his performance and reputation within the company as well. He should choose to have the project done where the work will be done well and at the lowest cost.

Whether expenses will appear in the income statement immediately or will be capitalized and allocated over a period of years should NOT be the driving factor in making the decision. He should be able to explain his decision to higher- ups and illustrate the different required accounting treatments. As a percent of net income, it spent For , the figures were 2.

PepsiCo: Intangible assets are PepsiCoamortizesamortizable intangible assets on a straight-line basis over their estimated useful lives. The nature of each of these is quite different; thus,an investorwould normally wantto know what the composition of intangible assets is if it is material. As a consequence, they feel that the requirement that research and develop- ment expenditures be expensed immediately penalizes those executives who do investin the future.

As a consequence,when net income does not look good, it is always tempting to cut research and development expenditures, since this will cause a direct increase in current year reported profits. Thisis becausecompaniesarenotallowed torecordinternally created goodwill. They can only report purchased goodwill.

Ironically, if you want to report a large amount of goodwill, all you have to do is overpay when you purchase another company—the more you overpay, the moregoodwillyouwillreport.

Obviously,reporting a lotofgoodwill is not such a good thing. Accountingnumbersare basedin many cases on historical costs, while market prices will reflect new information about the companyprospects. This situation does not look very promising. For Washington Mutual and E-Trade, the impairmentwill resultin a complete write-offof the goodwillasset.

Apparently, the prior acquisitions from which the goodwill was recorded did not pan out for these companies. Loss on Impairment Thus,the impair- ments will reduce the numerator in the return on asset ratio. There is no amortization for the trade name, which is considered an indefinite-life intangible.

Thetradenameis tested for impairmentusing a fair value test. Lost on Impairment Because impairments tend to be nonrecurring items, their recognition can make operating income more volatile from year to year. This volatility effect can be particularly severe for indefinite-life intangibles, such as a trade name or goodwill.

The higher carrying values due to no amortization , combined with the annual fair-value impairment test, can result in impairment losses having a signifi- cant impact on operating income. Principles The accountingfor impairments provides relevantinformationabout intangible assets by indicating in a timely fashion that intangible assets have declined in value.

However,providingthis timely information requires significantsubjectivejudgments relatedto estimating 1 expected cash flows for the cash flow recovery testand 2 fair values in determining the amountof the impairmentto be recognized. Theseestimates may raise concernsaboutthe faithful representation of impairment-loss amounts. Foreaseofreference, thistermalsoincludesthe immediate charge recognized by not-for-profit entities in accordance with paragraph Instead, goodwill shall be tested for impairment at a level of reporting referred to as a reporting unit.

Paragraphs through provide guidance on determining reporting units. Only if goodwillof that higher-level reporting unit is impaired would a goodwill impairment loss be recognized at the consolidated level.

Therefore the franchise is impaired. The impairment loss is computed as follows: Book value Intangible assets as of December 31, Franchises Thatis, an intangible asset is recognized separately from goodwill if it represents contractual or legal rights or is capable of being separated or divided and sold, transferred, licensed, rented or exchanged; 3 Under both IFRS and GAAP, limited life intangibles are subject to amortization, but goodwill and indefinite life intangibles are not amortized; rather they are assessed for impairment on an annual basis; 4 IFRS and GAAP are similar in the accounting for impairments of assets held for disposal.

Notable differences are: 1 while costs in the research phase are always expensed under both IFRS and GAAP, under IFRS costs in the development phase are capitalized once technological feasibility is achieved; 2 IFRS permits some capitalization of internally generated intangible assets e.

Value in use is the future cash flows to be derived from the particular asset, discounted to present value. Under GAAP, impairment losses cannot be reversedfor assetsto be held and used; the impairmentloss resultsin a new cost basis for the asset.

Thus, it will be challenging to develop converged standards for intangible assets, given the long-standing prohibition on capitalizing internally-generated intangible assets and research and development in GAAP. The loss is the difference between the recoverable amount and the carrying value. Given the uncertainmarket,economic viability is not met and these costs should be expensed as incurred. However,it is subjectto impairment,as discussed in IAS Goodwill does not generate cash flows independently of other assets or groups of assets, and often contributes to the cash flows of multiple cash-generating units.

Goodwill sometimes cannot be allocated on a non-arbitrary basis to individualcash-generating units,butonly to groupsofcash-generating units. As a result,the lowestlevelwithin the entity atwhich the goodwill is monitored for internalmanagementpurposessometimescomprises a number ofcashgenerating units to which the goodwillrelates,butto which it cannot be allocated. References in paragraphs 83—99 and Appendix C to a cash-generating unit to which goodwill is allocated should be read as references also to a group of cash-generating units to which goodwill is allocated IAS 36, par.

Applying the requirements in paragraph 80 results in goodwill being tested for impairmentat a levelthat reflects the way an entity manages its operations and with which the goodwill would naturally be associated.

Therefore, the development of additional reporting systems is typically not necessary par. A cash-generating unit to which goodwill is allocated for the purpose of impairment testing may not coincide with the level at which goodwill is allocatedin accordancewith IAS 21 The EffectsofChanges in Foreign Exchange Rates for the purpose of measuring foreign currency gains and losses.

For example, if an entity is required by IAS 21 to allocate goodwill to relatively low levels for the purpose of measuring foreign currency gains and losses, it is not required to test the goodwill for impairment at that same level unless it also monitors the goodwill at that level for internal management purposes par.

If the initial allocation of goodwill acquired in a business combination cannot be completed before the end of the annual period in which the business combination is effected, that initial allocation shall be completed before the end of the first annualperiodbeginning afterthe acquisition date par. In such circumstances it might also not be possible to complete the initial allocation of the goodwill recognised in the combination before the end ofthe annualperiodin which the combinationis effected.

Which of the following accounts would be increased with a debit? Rent Payable b. Service Revenue d. False 6. True 2. True 7. True 3. False 8. False 4. True 9. False 5. True True Multiple Choice 1. Debit Credit Apr. Debit Credit May 1 Cash Account Titles and Explanation Debit Credit 1. Advertising Expense Miscellaneous Expense Accounts Payable Salaries and Wages Expense Debit Credit Balance Apr.

Debit Credit Sept. Debit Credit Balance Sept. Exercises Problems 1. Indicate how accounts, 1, 2, 3, 4, 5, 1, 2, 5 1 1, 2, 4, 6, 7, 1A, 2A, 3A, debits, and credits are used 6, 7, 8, 9, 19, 14 5A to record business 21 transactions. Indicate how a journal is 10, 11, 12, 3, 4, 6 2 3, 5, 6, 7, 10, 1A, 2A, 3A, used in the recording 13, 14, 16 11, 12 5A process.

Explain how a ledger and 15, 17 7, 8 3 8, 9, 12 2A, 3A, 5A posting help in the recording process. Prepare a trial balance. Simple 20—30 2A Journalize transactions, post, and prepare a trial balance. Simple 30—40 3A Journalize transactions, post, and prepare a trial balance. Moderate 40—50 4A Prepare a correct trial balance. Moderate 30—40 5A Journalize transactions, post, and prepare a trial balance. DI PA 4. A T account has the following parts: a the title, b the left or debit side, and c the right or credit side.

The terms debit and credit mean left and right respectively. Heath is incorrect. The double-entry system merely records the dual effect of a transaction on the accounting equation. A transaction is not recorded twice; it is recorded once, with a dual effect. Erica is incorrect. A debit balance only means that debit amounts exceed credit amounts in an account.

Conversely, a credit balance only means that credit amounts are greater than debit amounts in an account. Thus, a debit or credit balance is neither favorable nor unfavorable. The basic steps in the recording process are: 1 Analyze each transaction for its effect on the accounts. The advantages of using the journal in the recording process are: 1 It discloses in one place the complete effects of a transaction.

When three or more accounts are required in one journal entry, the entry is referred to as a compound entry. An example of a compound entry is the purchase of equipment, part of which is paid for with cash and the remainder is on account.

It discloses in one place the complete effects of a transaction. It provides a chronological record of all transactions. The advantage of the last step in the posting process is to indicate that the item has been posted. The chart of accounts is important, particularly for a company that has a large number of accounts, because it helps organize the accounts and define the level of detail that a company desires in its accounting system. The primary purpose of a trial balance is to prove check that the debits equal the credits after posting.

A trial balance also facilitates the discovery of errors in journalizing and posting. In addition, it is useful in preparing financial statements. No, Victor is not correct. The proper sequence is as follows: b Business transaction occurs. Accounts Payable Decrease Increase Credit 2. Advertising Expense Increase Decrease Debit 3. Service Revenue Decrease Increase Credit 4. Accounts Receivable Increase Decrease Debit 5. Analyze each transaction.

In this step, business documents are examined to determine the effects of the transaction on the accounts. Enter each transaction in a journal. This step is called journalizing and it results in making a chronological record of the transactions. Transfer journal information to ledger accounts.

This step is called posting. Posting makes it possible to accumulate the effects of journalized transactions on individual accounts. The three activities would be recorded as follows: 1.

No entry because no transaction has occurred. An account shows increases and decreases in the item it relates to. An account has a left, or debit side, and a right, or credit side. Debit Credit Jan. Debits Credit Oct. Increase the asset Cash, increase the liability Notes Payable. Increase the asset Equipment, decrease the asset Cash. Increase the asset Supplies, increase the liability Accounts Payable. Rent Expense Accounts Receivable The general ledger is not a book of original entry; transactions are first recorded in the general journal, then in the general ledger.

No Credit 5. Debit Credit Mar. Debits Credit Apr. No entry—Not a transaction. Prepaid Rent Prepaid Insurance Utilities Expense Account Titles and Explanation Debit Credit Debit Credit Balance Mar.

Savings Bonds—this is a personal transaction. Debits Credits Balance Nov. Cash is increased. Cash is decreased. Cash is decreased or Accounts Payable is increased. Cash is decreased or Notes or Mortgage Payable is increased. Inventory: debit 1. Accounts Receivable: debit 2. Cash and Cash Equivalents: debit Equipment: debit 3. Accounts Payable: credit 3.

Cost of Goods debit Sold expense : Interest Expense: debit 4. Sales revenue credit b 1. Decrease in Salaries and Wages Payable: Cash is decreased credited.

Increase in Interest Expense: Cash is decreased credited. Interest Expense: debit 1. Net Product Revenues: credit 2. Cash and Cash debit 2.

Inventories: debit Equivalents: 3. Cost of Sales: debit b The following other accounts are ordinarily involved: 1. They issue the report to the more than , shareholders who hold shares. None of the other teams are publicly owned, so they have no obligation to make their financial information available except to their small group of owners.

Knowing how profitable the NFL teams are would be useful information for the players to know so that they would have a better sense of how much the teams could afford to pay.

Debits increase assets and credits increase revenues, so the journal entry is: Accounts Receivable Debits increase expenses and credits decrease assets, so the journal entry is: Salaries and Wages Expense However, if Ellynn is violating a company accounting policy by her action, then she is acting unethically. Miss the deadline but find the error causing the imbalance. Tell her supervisor of the imbalance and suffer the consequences. Do as she did and locate the error later, making the adjustment in the next quarter.

The board initially announced its support for the CEO. After further investigation, the board encouraged Mr. Edmondson to resign, which he did. Board members stated that they felt he was still the best person for the position.

Radio Shack says that although it did a reference check at the time of Mr. Under the Sarbanes-Oxley Act, companies must now perform thorough background checks as part of a check of internal controls. It is important that the steps that they identify be as specific as possible, and clearly directed toward achieving their goal. You may wish to ask a follow-up question asking them to explain how each step will assist them in achieving their goal.