Question

Highlight Company purchases the right to use a piece of music from the original musician who created it. Officials hope to make this music the company’s “signature song.” Therefore, the contract (which is signed on January 1, Year One) is for four years. The agreed upon price is $800,000, with no stated interest rate to be paid. Highlight could borrow this amount of money at a 5 percent annual interest rate at the current time. The arrangement states that Highlight will make this $800,000 payment on December 31, Year Four.

a. Record the journal entry for Highlight for the acquisition of this copyright on January 1, Year One.

b. Record the adjusting entries to recognize interest expense and amortization expense on December 31 of each of the subsequent four years.

c. Record the journal entry for the payment of the $800,000 on December 31, Year Four.

Answer 1

Working Notes		Discounting factor@5%	Payment	Present value of payment
	Year 4	0.82270247	800000	658161.98
	Interest expense schedule
			Beginning Balance	Interest	Ending Balance
	Year 0		0	0	658161.98
	Year 1		658161.9798	32908.099	691070.079
	Year 2		691070.0788	34553.5039	725623.583
	Year 2		725623.5828	36281.1791	761904.762
	Year 4		761904.7619	38095.2381	800000
	Date	General Journal		Debit	Credit
				Amount in $	Amount in $
Requirement a	January 1, Year 1	Copyright		658161.98
			Contracted Money/Loan payable		658161.98
		To record the acquisition of Copyright
Requirement b	December 31, Year 1	Interest expense		32908.10
			Contracted Money/Loan payable		32908.10
		To recognize the interest expense
	December 31, Year 1	Amortization expense		164540.49
			Copyright		164540.49
	December 31, Year 2	Interest expense		34553.50
			Contracted Money/Loan payable		34553.50
		To recognize the interest expense
	December 31, Year 2	Amortization expense		164540.49
			Copyright		164540.49
		To record the amortization expense
	December 31, Year 3	Interest expense		36281.18
			Contracted Money/Loan payable		36281.18
		To record the interest expense
	December 31, Year 3	Amortization expense		164540.49
			Copyright		164540.49
		To record the amortization expense
	December 31, Year 4	Interest expense		38095.24
			Contracted Money/Loan payable		38095.24
		To recognize the interest expense
	December 31, Year 4	Amortization expense		164540.49
			Copyright		164540.49
		To record the amortization expense
Requirement c	December 31, Year 4	Contracted Money/Loan payable		800000.00
			Cash		800000.00