homework due 021513 JAIN
Larry Byrd, Inc., spent $111,320 in attorney fees while developing the trade name of its new product, the Mean Bean Machine. Prepare the journal entries to 1) record the $111,320 expenditure and 2) the first year’s amortization, using an 11-year life. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)
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No. |
Account Titles and Explanation |
Debit |
Credit |
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1. |
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2. |
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2. Amortization Expense = ($111,320 x 1/11) = $10,120
On September 1, 2012, Winans Corporation acquired Aumont Enterprises for a cash payment of $717,130. At the time of purchase, Aumont’s balance sheet showed assets of $607,070, liabilities of $206,980, and owners’ equity of $400,090. The fair value of Aumont’s assets is estimated to be $813,000. Compute the amount of goodwill acquired by Winans.
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Value assigned to goodwill |
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$ |
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Purchase price |
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$717,130 |
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Fair value of assets |
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$813,000 |
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Fair value of liabilities |
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206,980 |
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Fair value of net assets |
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606,020 |
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Value assigned to goodwill |
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$111,110 |
Nieland Industries had one patent recorded on its books as of January 1, 2012. This patent had a book value of $342,360 and a remaining useful life of 9 years. During 2012, Nieland incurred research and development costs of $116,430 and brought a patent infringement suit against a competitor. On December 1, 2012, Nieland received the good news that its patent was valid and that its competitor could not use the process Nieland had patented. The company incurred $110,580 to defend this patent. At what amount should patent(s) be reported on the December 31, 2012, balance sheet, assuming monthly amortization of patents?
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The amount to be reported |
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$ |
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Carrying Amount |
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Life in Months |
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Amortization Per Month |
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Months Amortization |
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Patent (1/1/12) |
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$342,360 |
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108 |
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$3,170 |
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12 |
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Legal costs (12/1/12) |
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110,580 |
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97 |
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$1,140 |
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1 |
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$452,940 |
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Carrying amount |
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$452,940 |
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Less: |
Amortization of patent |
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(12 x $3,170) |
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(38,040 |
) |
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Legal costs amortization |
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(1 x $1,140) |
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(1,140 |
) |
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Carrying amount 12/31/12 |
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$413,760 |
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Presented below is a list of items that could be included in the intangible assets section of the balance sheet. Indicate which items on the list below would generally be reported as intangible assets in the balance sheet.
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Reported as |
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1. |
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Investment in a subsidiary company. |
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2. |
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Timberland. |
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3. |
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Cost of engineering activity required to advance the design of a product to the manufacturing stage. |
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4. |
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Lease prepayment (6 months’ rent paid in advance). |
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5. |
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Cost of equipment obtained. |
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6. |
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Cost of searching for applications of new research findings. |
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7. |
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Costs incurred in the formation of a corporation. |
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8. |
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Operating losses incurred in the start-up of a business. |
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9. |
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Training costs incurred in start-up of new operation. |
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10. |
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Purchase cost of a franchise. |
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11. |
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Goodwill generated internally. |
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12. |
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Cost of testing in search for product alternatives. |
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13. |
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Goodwill acquired in the purchase of a business. |
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14. |
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Cost of developing a patent. |
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15. |
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Cost of purchasing a patent from an inventor. |
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16. |
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Legal costs incurred in securing a patent. |
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17. |
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Unrecovered costs of a successful legal suit to protect the patent. |
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18. |
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Cost of conceptual formulation of possible product alternatives. |
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19. |
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Cost of purchasing a copyright. |
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20. |
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Research and development costs. |
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21. |
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Long-term receivables. |
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22. |
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Cost of developing a trademark. |
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23. |
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Cost of purchasing a trademark. |
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Devon Harris Company has provided information on intangible assets as follows. A patent was purchased from Bradtke Company for $2,707,000 on January 1, 2011. Harris estimated the remaining useful life of the patent to be 10 years. The patent was carried in Bradtke’s accounting records at a net book value of $1,921,400 when Bradtke sold it to Harris. During 2012, a franchise was purchased from Greene Company for $548,200. In addition, 5% of revenue from the franchise must be paid to Greene. Revenue from the franchise for 2012 was $2,394,000. Harris estimates the useful life of the franchise to be 10 years and takes a full year’s amortization in the year of purchase. Harris incurred research and development costs in 2012 as follows.
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Materials and equipment |
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$141,300 |
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Personnel |
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191,700 |
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Indirect costs |
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103,800 |
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$436,800 |
Harris estimates that these costs will be recouped by December 31, 2015. The materials and equipment purchased have no alternative uses. On January 1, 2012, because of recent events in the field, Harris estimates that the remaining life of the patent purchased on January 1, 2011, is only 5 years from January 1, 2012. (a) Prepare the intangibles section of harris's balance sheet at December 31, 2012.
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DEVON HARRIS COMPANY Balance Sheet (Partial) December 31, 2012 |
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$ |
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$ |
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(b) Compute the income statement effect for the year ended December 31, 2012 as a result of the facts above.
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Total charged against income |
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$ |
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(a) |
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Schedule 1 Computation of Patent from Bradtke Company |
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Cost of patent at date of purchase |
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$2,707,000 |
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Amortization of patent for 2011 |
= |
($2,707,000 ÷ 10 years) |
= |
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(270,700 |
) |
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2,436,300 |
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Amortization of patent for 2012 |
= |
($2,436,300 ÷ 5 years) |
= |
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(487,260 |
) |
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Patent balance |
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$1,949,040 |
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Schedule 2 Computation of Franchise from Greene Company |
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Cost of franchise at date of purchase |
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$548,200 |
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Amortization of franchise for 2012 |
= |
($548,200 ÷ 10) |
= |
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(54,820 |
) |
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Franchise balance |
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$493,380 |
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(b)
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DEVON HARRIS COMPANY Income Statement Effect For the Year Ended December 31, 2012 |
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Patent from Bradtke Company: |
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Amortization of patent for 2012 ($2,436,300 ÷ 5 years) |
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$487,260 |
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Franchise from Greene Company: |
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Amortization of franchise for 2012 ($548,200 ÷ 10) |
$54,820 |
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Payment to Greene Company ($2,394,000 x 5%) |
119,700 |
174,520 |
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Research and development costs |
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436,800 |
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Total charged against income |
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$1,098,580 |
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.
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TERRELL GALLERIES BALANCE SHEET AS OF DECEMBER 31, 2012 |
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Assets |
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Liabilities and Stockholders’ Equity |
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Cash |
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$100,490 |
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Accounts payable |
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$49,700 |
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Land |
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70,610 |
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Notes payable (long term) |
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302,060 |
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Buildings (net) |
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204,100 |
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Total liabilities |
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351,760 |
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Equipment (net) |
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176,030 |
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Common stock |
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$235,500 |
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Copyrights (net) |
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29,920 |
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Retained earnings |
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-6,110 |
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229,390 |
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Total assets |
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$581,150 |
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Total liabilities and stockholders’ equity |
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$581,150 |
Graf and Terrell agree that:
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1. |
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Land is undervalued by $51,460. |
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2. |
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Equipment is overvalued by $5,310. |
Terrell agrees to sell the gallery to Graf for $381,180. Prepare the entry to record the purchase of Terrell Galleries on Graf’s books. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)
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Account Titles and Explanation |
Debit |
Credit |
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Net assets of Terrell as reported |
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($581,150 – $351,760) |
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$229,390 |
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Adjustments to fair value |
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Increase in land value |
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51,460 |
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Decrease in equipment value |
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(5,310 |
) |
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46,150 |
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Net assets of Terrell at fair value |
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275,540 |
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Selling price |
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381,180 |
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Amount of goodwill to be recorded |
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$105,640 |
On July 31, 2012, Mexico Company paid $3,004,200 to acquire all of the common stock of Conchita Incorporated, which became a division of Mexico. Conchita reported the following balance sheet at the time of the acquisition.
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Current assets |
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$860,000 |
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Current liabilities |
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$600,600 |
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Noncurrent assets |
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2,735,400 |
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Long-term liabilities |
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592,900 |
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Total assets |
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$3,595,400 |
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Stockholders’ equity |
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2,401,900 |
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Total liabilities and stockholders’ equity |
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$3,595,400 |
It was determined at the date of the purchase that the fair value of the identifiable net assets of Conchita was $2,758,200. Over the next 6 months of operations, the newly purchased division experienced operating losses. In addition, it now appears that it will generate substantial losses for the foreseeable future. At December 31, 2012, Conchita reports the following balance sheet information.
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Current assets |
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$457,600 |
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Noncurrent assets (including goodwill recognized in purchase) |
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2,456,200 |
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Current liabilities |
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(729,500 |
) |
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Long-term liabilities |
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(502,900 |
) |
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Net assets |
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$1,681,400 |
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It is determined that the fair value of the Conchita Division is $1,852,500. The recorded amount for Conchita’s net assets (excluding goodwill) is the same as fair value, except for property, plant, and equipment, which has a fair value $154,800 above the carrying value. (a) Compute the amount of goodwill recognized, if any, on July 31, 2012.
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The amount of goodwill |
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$ |
(b) Determine the impairment loss, if any, to be recorded on December 31, 2012.
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The impairment loss |
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$ |
(c) Assume that fair value of the Conchita Division is $1,629,900 instead of $1,852,500. Determine the impairment loss, if any, to be recorded on December 31, 2012.
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The impairment loss |
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$ |
(d) Prepare the journal entry to record the impairment loss, if any, and indicate where the loss would be reported in the income statement. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)
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Account Titles and Explanation |
Debit |
Credit |
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This loss will be reported in income as a separate line item before the subtotal |
(a) Goodwill = Excess of the cost of the division over the fair value of the identifiable assets: $3,004,200 – $2,758,200 = $246,000 (b) No impairment loss is recorded, because the fair value of Conchita ($1,852,500) is greater than carrying value of the net assets ($1,681,400). (c) Computation of impairment: Implied fair value of goodwill = Fair value of division less the carrying value of the division (adjusted for fair value changes), net of goodwill:
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Fair value of Conchita division |
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$1,629,900 |
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Carrying value of division |
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$1,681,400 |
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Increase in fair value of PP&E |
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154,800 |
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Less: Goodwill |
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246,000 |
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(1,590,200 |
) |
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Implied fair value of goodwill |
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39,700 |
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Carrying value of goodwill |
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(246,000 |
) |
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Impairment loss |
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($206,300 |
) |
(d) This loss will be reported in income as a separate line item before the subtotal “income from continuing operations.”
Waterworld Company leased equipment from Costner Company. The lease term is 5 years and requires equal rental payments of $36,320 at the beginning of each year. The equipment has a fair value at the inception of the lease of $149,000, an estimated useful life of 5 years, and no salvage value. Waterworld pays all executory costs directly to third parties. The appropriate interest rate is 11%. Prepare Waterworld’s January 1, 2012, journal entries at the inception of the lease. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)
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Account Titles and Explanation |
Debit |
Credit |
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(To record the lease.) |
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(To record first lease payment.) |
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Assume that IBM leased equipment that was carried at a cost of $150,000 to Sharon Swander Company. The term of the lease is 6 years beginning January 1, 2012, with equal rental payments of $30,044 at the beginning of each year. All executory costs are paid by Swander directly to third parties. The fair value of the equipment at the inception of the lease is $150,000. The equipment has a useful life of 6 years with no salvage value. The lease has an implicit interest rate of 8%, no bargain-purchase option, and no transfer of title. Collectibility is reasonably assured with no additional cost to be incurred by IBM. Prepare IBM’s January 1, 2012, journal entries at the inception of the lease. (Credit account titles are automatically indented when amount is entered. Do not indent manually. Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971.)
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Account Titles and Explanation |
Debit |
Credit |
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(To record the lease.) |
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(To record first lease payment.) |
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Lease Receivable = (4.99271 x $30,044) = $150,000
Indiana Jones Corporation enters into a 7-year lease of equipment on January 1, 2012, which requires 7 annual payments of $36,510 each, beginning January 1, 2012. In addition, Indiana Jones guarantees the lessor a residual value of $20,530 at lease-end. The equipment has a useful life of 7 years. Prepare Indiana Jones’ January 1, 2012, journal entries assuming an interest rate of 12%. (Credit account titles are automatically indented when amount is entered. Do not indent manually. Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971.)
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Account Titles and Explanation |
Debit |
Credit |
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(To record the lease.) |
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(To record first lease payment.) |
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Leased Equipment |
= |
PV of rentals |
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$36,510 x 5.11141 |
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$186,618 |
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PV of guar. RV |
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$20,530 x 0.45235 |
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9,287 |
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$195,905 |
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b. The parts of this question must be completed in order. This part will be available when you complete the part above.
On February 20, 2012, Hooke Inc., purchased a machine for $1,206,000 for the purpose of leasing it. The machine is expected to have a 10-year life, no residual value, and will be depreciated on the straight-line basis. The machine was leased to Sage Company on March 1, 2012, for a 4-year period at a monthly rental of $13,200. There is no provision for the renewal of the lease or purchase of the machine by the lessee at the expiration of the lease term. Hooke paid $30,096 of commissions associated with negotiating the lease in February 2012: (a) What expense should Sage Company record as a result of the facts above for the year ended December 31, 2012?
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Rent Expense |
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$ |
(b) What income or loss before income taxes should Hooke record as a result of the facts above for the year ended December 31, 2012? (Hint: Amortize commissions over the life of the lease.)
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Income from lease before taxes |
|
$ |
(a)
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SAGE COMPANY Rent Expense For the Year Ended December 31, 2012 |
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Monthly rental |
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$13,200 |
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Lease period in 2013 (March–December) |
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x 10 months |
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$132,000 |
(b)
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HOOKE INC. Income or Loss from Lease before Taxes For the Year Ended December 31, 2012 |
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Rental revenue ($15,600 x 10 months) |
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$132,000 |
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Less expense |
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Depreciation |
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$100,500 |
* |
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Commission |
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6,270 |
** |
|
106,770 |
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Income from lease before taxes |
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$25,230 |
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* |
$1,206,000 cost ÷ 10 years |
= |
$120,600/year |
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$120,600 x 10/12 |
= |
$100,500 |
**Under principles of accrual accounting, the commission should be amortized over the life of the lease: $30,096 ÷ 4 years = $7,524 x 10/12 = $6,270.
The following facts pertain to a noncancelable lease agreement between Alschuler Leasing Company and McKee Electronics, a lessee, for a computer system.
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Inception date |
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October 1, 2012 |
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Lease term |
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6 |
years |
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Economic life of leased equipment |
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6 |
years |
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Fair value of asset at October 1, 2012 |
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$317,912 |
|
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Residual value at end of lease term |
|
–0– |
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Lessor’s implicit rate |
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11 |
% |
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Lessee’s incremental borrowing rate |
|
11 |
% |
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Annual lease payment due at the beginning of |
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each year, beginning with October 1, 2012 |
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$67,700 |
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The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor. The lessee assumes responsibility for all executory costs, which amount to $5,220 per year and are to be paid each October 1, beginning October 1, 2012. (This $5,220 is not included in the rental payment of $67,700.) The asset will revert to the lessor at the end of the lease term. The straight-line depreciation method is used for all equipment. The following amortization schedule has been prepared correctly for use by both the lessor and the lessee in accounting for this lease. The lease is to be accounted for properly as a capital lease by the lessee and as a direct-financing lease by the lessor.
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Date |
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Annual Lease Payment/Receipt |
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Interest (11%) on Unpaid Liability/Receivable |
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Reduction of Lease Liability/Receivable |
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Balance of Lease Liability/Receivable |
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10/01/12 |
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$317,912 |
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10/01/12 |
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$ 67,700 |
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$67,700 |
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250,212 |
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10/01/13 |
|
67,700 |
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$27,523 |
|
40,177 |
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210,035 |
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10/01/14 |
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67,700 |
|
23,104 |
|
44,596 |
|
165,439 |
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10/01/15 |
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67,700 |
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18,198 |
|
49,502 |
|
115,937 |
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10/01/16 |
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67,700 |
|
12,753 |
|
54,947 |
|
60,990 |
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10/01/17 |
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67,700 |
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6,710 |
|
60,990 |
|
–0– |
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$406,200 |
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$88,288 |
|
$317,912 |
|
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(a) Assuming the lessor’s accounting period ends on September 30, answer the following questions with respect to this lease agreement. (Round answers to 0 decimal places e.g. 58,971.) (1) What items and amounts will appear on the lessor’s income statement for the year ending September 30, 2013?
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$ |
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(2) What items and amounts will appear on the lessor’s balance sheet at September 30, 2013?
|
Balance Sheet (Partial) September 30, 2013 |
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Current Assets |
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$ |
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$ |
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$ |
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Noncurrent Assets |
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$ |
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(3) What items and amounts will appear on the lessor’s income statement for the year ending September 30, 2014?
|
$ |
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(4) What items and amounts will appear on the lessor’s balance sheet at September 30, 2014?
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Balance Sheet (Partial) September 30, 2014 |
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Current Assets |
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$ |
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$ |
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$ |
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Noncurrent Assets |
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$ |
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(b) Assuming the lessor’s accounting period ends on December 31, answer the following questions with respect to this lease agreement. (Round answers to 0 decimal places e.g. 58,971.) (1) What items and amounts will appear on the lessor’s income statement for the year ending December 31, 2012?
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$ |
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(2) What items and amounts will appear on the lessor’s balance sheet at December 31, 2012?
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Balance Sheet (Partial) December 31, 2012 |
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Current Assets |
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$ |
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$ |
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$ |
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Noncurrent Assets |
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$ |
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(3) What items and amounts will appear on the lessor’s income statement for the year ending December 31, 2013?
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$ |
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(4) What items and amounts will appear on the lessor’s balance sheet at December 31, 2013?
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Balance Sheet (Partial) December 31, 2013 |
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Current Assets |
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$ |
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$ |
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$ |
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Noncurrent Assets |
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$ |
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(b) (1) |
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Interest revenue |
= |
($27,523 x 3/12) |
= |
$6,881 |
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(3) |
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Interest revenue |
= |
[($27,523 – $6,881) + ($23,104 x 3/12) = [$20,642 + $5,776] |
= |
$26,418 |