Question

2. Illustrate the effects on the accounts and financial statements of recording the following transactions. For decreases in accounts or outflows of cash, enter your answers as negative numbers. If no account or activity is affected, select "No effect" from the dropdown and leave the corresponding number entry box blank.

a. On December 31, Gemini Company determined that $3,000,000 of goodwill was impaired.

Statement of Cash Flows Balance Sheet Assets = Liabilities + Stockholders' Equity Accounts receivable + No effect = No effect + No effect Dec. 31. Statement of Cash Flows Income Statement No effect No effect

b. Governmental and legal costs of $920,000 were incurred by Gemini Company on June 30 in obtaining a patent with an estimated economic life of eight years. Amortization is to be for one-half year.

Statement of Cash Flows Balance Sheet Assets = Liabilities + Stockholders' Equity + = + Dec. 31. Statement of Cash Flows Income Statement

Answer 1

Ans 2a. The effect of impairment of goodwill of $3,000,000 on the Gemini Company on the cash flow will have no effect as it is a non-cash expense and they will be added back to net operating income in operating activities when reconciling profit before tax to cash generated from operationg activities.- So no effect.

But as there is impairment of goodwill and goodwill is not revalued so it will be deducted from profit and loss account as other non operating expense.- So negative.

Ans 2b. The effect of amortisation of patent of the Gemini Company on the cash flow will have no effect as it is a non-cash expense and they will be added back when reconciling profit before tax to cash generated from operationg activities.- So no effect.

But as there is amortisation of patent it will be deducted from profit and loss account as reduction off income from income statement as it will also reduce retained earnings and so stockholders equity will also be reduce, an amount of $57500 for half year will be deducted.- So negative.