Question

Intangibles. Sorenson Manufacturing Corporation was incorporated on January 3, 2016. The corporation’s financial statements for its first year’s operations were not examined by a CPA. You have been engaged to audit the financial statements for the year ended December 31, 2017, and your work is substantially completed. A partial trial balance of the company’s accounts follows:

SORENSON MANUFACTURING CORPORATION
Trial Balance
at December 31, 2017
	Debit				Credit
Cash	$	11,000
Accounts receivable		42,500
Allowance for doubtful accounts					$	500
Inventories		38,500
Machinery		75,000
Equipment		29,000
Accumulated depreciation						10,000
Patents		85,000
Leasehold improvements		26,000
Prepaid expenses		10,500
Organization expenses		29,000
Goodwill		24,000
Licensing Agreement No. 1*		50,000
Licensing Agreement No. 2*		49,000

* An intangible asset representing the right to use a patent.

The following information relates to accounts that may yet require adjustment:

Patents for Sorenson’s manufacturing process were purchased January 2, 2017, at a cost of $68,000. An additional $17,000 was spent in December 2016 to improve machinery covered by the patents and charged to the Patents account. The patents had a remaining legal term of 17 years.

On January 3, 2014, Sorenson purchased two licensing agreements; at that time they were believed to have unlimited useful lives. The balance in the Licensing Agreement No. 1 account included its purchase price of $48,000 and $2,000 in acquisition expenses. Licensing Agreement No. 2 also was purchased on January 3, 2016, for $50,000, but it has been reduced by a credit of $1,000 for the advance collection of revenue from the agreement.

In December 2016, an explosion caused a permanent 60 percent reduction in the expected revenue-producing value of Licensing Agreement No. 1 and, in January 2017, a flood caused additional damage, which rendered the agreement worthless.

A study of Licensing Agreement No. 2 made by Sorenson in January 2017 revealed that its estimated remaining life expectancy was only 10 years as of January 1, 2017.

The balance in the Goodwill account includes $24,000 paid December 30, 2016, for an advertising program, which it is estimated will assist in increasing Sorenson’s sales over a period of four years following the disbursement.

The Leasehold Improvement account includes (a) the $15,000 cost of improvements with a total estimated useful life of 12 years, which Sorenson, as tenant, made to leased premises in January 2016; (b) movable assembly-line equipment costing $8,500, which was installed in the leased premises in December 2017; and (c) real estate taxes of $2,500 paid by Sorenson, which, under the terms of the lease, should have been paid by the landlord. Sorenson paid its rent in full during 2017. A 10-year nonrenewable lease was signed January 3, 2016, for the leased building that Sorenson used in manufacturing operations.

The balance in the Organization Expenses account includes preoperating costs incurred during the organizational period.

Required:

1. For each of the items 1–7, prepare adjusting entries as necessary. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

1 THE IMPROVEMENT COST IS RELATED TO MACHINERY AND NOT TO THE PATENT OF MANUFACTURING PROCESS SO WE WILL RECTIFY IT BY DEBITING IMPROVEMENT COST TO MACHINE ACCOUNT BECAUSE IT IMPROVE THE MACHINE CAPACITY ITS A CAPEX.

Machinery Dr. 17000 Patent Cr. 17000

Now the patent has carrying value of 85000 less 17000 = 65000 which is to be amortised in the definite life of 17 year so the amortisation cost for the year is 68000/17 = 4000

Amortisation Cost. Dr. 4000 Patent Cr. 4000

2. THE LICENSING AGREEMENT HAS NO WORTH SO WE WILL IMPAIR IT

IMPAIRMENT OF LICENSING AGREEMENT 1 Dr. 50000

LICENSING AGREEMENT 1 Cr. 50000

THE LICENSING AGREEMENT 2 WAS PURCHASED IN January 2016 THE REVENUE INCOME FROM IT, WAS USED TO REDUCING COST WHICH IS WRONG.WE WILL CORRECT IT FIRST. IT WAS EXPECTED TO HAVE AN INDIFINATE LIFE AT THAT TIME BUT IT WAS EXPECTED TO HAVE A LIFE OF 10 YEARS IN THE YEAR 2017 SO THE FAIR VALUE HAS CHANGED OF LICENSING AGREEMENT 2

Licensing agreement 2 Dr. 1000. Revenue/ P&L Rectification. Cr. 1000

Now The Value of Licensing Agreement 2 is 50000

It will amortised in next 10 years from 2017 so in 2017 we will amortise it by 50000/10. = 5000

Amortisation of licensing agreement 2 Dr. 5000. Licensing agreement 2 Cr. 5000

3. The Advertising Expenses were recorded wrongly as Goodwill. Also the ADVERTISING EXPENSE ARE SELLING EXPENSE AND NOT AN INTANGIBLE ASSETS.

ADVERTISING EXPENSE. Dr. 24000. GOODWILL Cr. 24000

4. The leasehold improvement should not include movable equipment and assets which are separate from leasehold property.but includes expense on leasehold property which is not separable. Also the repairs and maintenance in Norma course of business is not cost to lessee for including in improvement cost. The expense paid on behalf of lesser is not the part of cost.

(b) Movable equipment Dr. 8500.   

(C)Taxes on behalf of lesser Dr. 2500

Leasehold improvements. Cr. 11000

So the cost of improvements are 15000 which is depriciable in 12 years from January 2016 So we retrospectively record the depreciation .

Depreciation/ Accumulated Depreciation. Dr. 2500. (15000/12. Years) *2

Leasehold improvements cost. Cr. 2500

5. THE PRE OPERATING COST ARE PRELIMINARY COST WHICH IS INCURRED BEFORE INCORPORATION AND ORGNIZATIONAL COST ARE INCURRED TO CREATE AN ORGANISATION THE TWO ARE USED SYNONYMOUSLY IN SOME COUNTRIES AND DIFFERENT IN OTHER COUNTRIES. SO WE CAN DEBIT THE PRELIMINARY COST IN PLACE OF ORGANISATION COST.

The above entries are on 31 December 2017 and All figures are in dollars.