Question

Prepare in journal entry form all adjusting and correcting journal entries based on the following information.  All information was provided to you as of 12/31/2018.  (Round all numbers to the nearest dollar).

(i) Czar has two loans outstanding as of 12/31/2018. Interest is paid annually on January 1st. The facts on each loan are as follows: First Trust Bank Loan – outstanding since January 1, 2018 with a 6% interest rate. This loan was taken out to finance the construction of the Storage Building. Interest for the year and 10% of the principle will be paid to the bank on                                         January 1, 2019.  Except for recording the initial cash received and loan, no additional entries have been made. Loan Payable has a credit balance of $520,000 for First Trust Ban Coldwell Bank Loan – also outstanding all of 2018 with 5 % interest rate. Interest is due on January 1, 2019. Principle is due on January 1, 2025.  Since interest will not be paid to the Bank until 2019, Czar’ office staff did not accrue any interest. Loan Payable has a credit balance of $1,600,000 for Coldwell Bank.

(J) On January 1, 2018, Czar recorded a patent in the amount of $120,000. The company paid outside legal fees of $64,000 to have the patent registered. The other $56,000 represents internal costs in developing the patent. The patent is good for 20 years, but the company estimates that the patent will have a useful life of 8 years with no residual value. Amortization is straight line. The company depreciates using partial years for intangible assets.  No amortization has been recorded for 2018.

(K) As of 12/31/2018 the Available for Sale Securities have a fair value of $232,430. Due to the market conditions, the company does not plan on selling the assets in 2019, but their intent is to sell at some point in time. You can ignore the tax effect on unrealized gains and losses.

(L) The office building was bought in January 1, 2016 and Czar plans to use the building for 40 years and believes it will have a salvage value of $200,000 at the end of 40 years.  Czar depreciates the building on a straight line basis. Due to the location of the building and use potential, Czar is concerned about impairment.  At 12/31/2018 it is determined that the future cash flows for the building are $2,400,000. The fair value of the building is $2,720,000 at 12/31/2018.  

Answer 1

i)

Date	Account Description	Debit	Credit
31-Dec-18	Interest Expesnes	$ 52,000
	Interest Outstanding		$ 52,000
	(Being Interest accrued on First Truck Loan)
31-Dec-18	Interest Expesnes	$ 80,000
	Interest Outstanding		$ 80,000
	(Being Interest accrued on Coldwell Bank Loan)

Workings:

First Trust Bank Loan	$            520,000
Interest Rate	10%
Interest Expenses (520000x10%)	$              52,000

Coldwell Bank Loan	$        1,600,000
Interest Rate	5%
Interest Expenses (1600000x10%)	$              80,000

j)

Date	Account Description	Debit	Credit
31-Dec-18	Expesnes	$ 56,000
	Patent		$ 56,000
	(To record the correction of Book Value of Patent)
31-Dec-18	Amortization Expenses	$    8,000
	Accumulated Amortization		$    8,000
	(To record the amortization expenses on the patent)

Patent to be Captilized	$              64,000
useful life	8 Years
Amortization (64000/8)	$                8,000

Costs incurred internally to create patents are expensed off in the income statement as and when incurred.

k)

Date	Account Description	Debit	Credit
31-Dec-18	Unrealized holding loss	$ 67,570
	Available for sale securities		$ 67,570
	(To adjust the book value of AFS Securities)

Workings:

Book Value of Security	$            300,000
Fair Value of Security	$            232,430
Unrealized holding loss	$              67,570

L)

Date	Account Description	Debit	Credit
31-Dec-18	Retained Earnings	$ 70,000
	Accumulated Depreciation- Office Buildings		$ 70,000
	(To Record the adjustment for 2017 Depreciation)
31-Dec-18	Depreciation Expenses	$ 70,000
	Accumulated Depreciation- Office Buildings		$ 70,000
	(To Record 2018 Depreciation)
31-Dec-18	Impairement Loss	$ 70,000
	Accumulated Impairement Loss		$ 70,000
	(To Record the impairment loss)

Workings:

Book Value of Office Building	$        3,000,000
Salvage Value	$            200,000
Depreciable Value	$        2,800,000
Useful Life	40 Years
Depreciation(2800000/40)	$              70,000
Net Book Value as on 31st Dec 2018
Book Value of Office Building	$        3,000,000
Less: Accumulated Depreciation (70000x3)	$            210,000
Net Book Value as on 31st Dec 2018	$        2,790,000

If, the net book value ($ 2,790,000) of the asset is more than the future cash flow ($ 2,400,000) of the assets then it indicates that impairment exists.

Now, to Calculate the impairment we will compare the Net Book Value with the Fair Value:

Net Book Value as on 31st Dec 2018	$        2,790,000
fair value of the building	$        2,720,000
Impairment Loss	$              70,000

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