Question

On the designated worksheet, prepare in journal entry form all adjusting and correcting journal entries based on the following information (round all numbers to the nearest dollar). Letter entries to correspond to the below information and present them in alphabetical order. Add any new accounts as needed to the trial balance. Each entry must be entirely correct to receive allocated points. Before preparing entries, finish the story by filling in the blanks.

Accounting Creations was authorized to issue 3,000,000 shares of $1 par Common Stock but has only issued 650,000 shares of common stock as of 12/31/2018. No new shares were issued during 2018.

I.) Accounting Creations Double Entry has two loans outstanding as of 12/31/2018. Interest is paid annually on January 1st.  The facts on each loan are as follows:

Onstar Bank Loan - outstanding since January 1, 2018 with a 4.0% 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.

Coldstar Bank Loan - also outstanding all of 2018 with 3.03 % interest rate Interest is due on January 1, 2019. Principle is due on January 1, 2024. Since interest will not be paid to the Bank until 2019, Accounting Creations' office staff did not accrue any interest.

J.) On March 1, 2018 (enter your birthday month), Accounting Creations recorded a patent in the amount of $150,000. The company paid outside legal fees of $80,000 to have the patent registered. The other $70,000 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 6 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 $290,553 (enter the last three digits of your student number). 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 Accounting Creations plans to use the building for 40 years and believes it will have a salvage value of $250,000 at the end of 40 years. Accounting Creations depreciates the building on a straight line basis. Due to the location of the building and use potential, Accounting Creations is concerned about impairment. At 12/31/2018 it is determined that the future cash flows for the building are $3,000,000. The fair value of the building is $3,400,000 (last digit of your student number) at 12/31/2018.

Answer 1

I.  Onstar Bank Loan - This loan was taken for Financing the construction of Storage Building. Hence the interest expense for the year will not be charged to Profit and Loss Account and the same shall be capitalized.

There are various parameters laid down for interest capitalization. The asset should be a qualifying asset. Also the interest which can be capitalized is lower of Capitalized Interest and Interest Accrued.

in the current question we are assuming that the asset is qualifying one and accrued interest is same as capitalized interest. Below is the scheme of entry -

Interest Expense Account - Debit   

Interest Payable on Onstar Loan - Credit

(Principal amount is not mentioned, hence absolute amount is not mentioned)

Storage Building Account Debit

Interest Expense Credit

(As we can see from above entry is that the interest expense is not charged to Profit and Loss account as an expense instead the same is capitalized)

Coldstar Loan - In the lack of information about the purpose of the loan it has been assumed that this is part of normal business debt.

Although the interest is not payable till 1 January 2019 but the interest expense and the liability needs to be provided for. please refer below for scheme of entries.

Interest Expense Account - Debit   

Interest Payable on Coldstar Loan - Credit

(Principal amount is not mentioned, hence absolute amount is not mentioned)

Profit And Loss Account Debit

Interest Expense Account Credit

(Interest expense charged off as expense for the current period)

J. In the given situation the company records the patent on 1 March 2018 at 150,000. The break up 150,000 which got capitalized is 80,000 for Legal fees and 70,000 for internal cost for developing. However internal cost incurred on Research and Development should not been capitalized, because such cost are inherently risky without any future assurance on benefit and this expense should be charged of to expense. Refer below for correction entry

Correction of Patent Value

Development Cost Account Debit 70,000

Patents Credit 70,000

(Patent Value reduced by 70,000)

Charging of development cost to Profit and Loss Account

Profit and Loss Account Debit 70,000

Development Cost Credit 70,000

Hence revised value of Patent 80,000.

Now although the legal life for patent is 20 years however the economic life estimated by company is 6 years only. In this kind of situation the lower of the two shall be taken i.e. 6 years

The company depreciates using partial years for intangible assets.? Under Partial year amortization method there are two method Nearest Whole Month Amortization and Half year Amortization.

Under Half year it does not matter at what date the asset recorded a flat 6 month interest is recorded.

under Nearest whole month to the date of recording is taken for calculating. for e.g. if the asset was record on 18 March then we would have taken March as well for amortization calculation.

In the given case the asset was recorded on 1 March hence 10 Month interest shall be charged off . Refer Below entry

Amortization expense = (80,000/6)*10/12 = 11,111.

Amortization Expense debit 11,111

Accumulated Amortization credit 11,111

k. More information needed as regard to cost of Available for Sale Securities to derive the gain/loss.

However since this is Available for sales Securities the fair value of which is 290,553. And as per the information provided due to given market condition the company is not selling this.

Now let us assume that the cost of this securities is higher than the FMV in this case loss should be booked in Other Comprehensive Income (OCI) and If the cost is lower than the FMV then unrealized gain should be booked in OCI.

Entries

a. LOSS

Unrealized gain/loss - Other Comprehensive Income Debit

Available for Sale Securities Credit.

b. Gain

Available for Sale Securities Debit.

Unrealized gain/loss - Other Comprehensive Income Credit

L. Since the details about the cost of office building is not mentioned hence we are not able to calculate the carrying value as on the Balance Sheet date to do impairment testing.

Impairment means the recoverable amount of asset below its book value.

Impairment = Carrying value of Asset > Recoverable amount

Recoverable Amount is Higher of Fair Market Value and Future Value of cash flow(Value in use).

Hence if we need to provide for impairment

Impairment Loss Debit

Accumulated Impairment Loss Credit.