INTERMEDIATE ACCOUNTING 322
TAD MILLER
TEST 01 1/29/07
INTANGIBLE ASSETS & STOCKHOLDERS' EQUITY
TEST 01. FALL 2007
for all journal entries, clearly label whether each account is an (A)sset, (L)iability, (O)wners' Equity, (R)evenue
or (E)xpense.
1. Financial Statement Presentation If a company owns a trademark, on which financial statement(s) will
the amortization expense related to that trademark appear? Describe its location on that financial
statement.
2. Trademark We pay employees working for Our Co. $136,500 in wages to develop a logo and
trademark for Our Co. We also pay an outside law firm $50,000 to register our trademark with the U.S.
Patent and Trademark Office. Prepare the entry to record these transactions.
3. Patents On Jan. 2, 2007, Our Co. paid $40,000 for a patent covering a portable music player. The
remaining legal life of the patent is three years. Our Co. believes there will be a market for the music
player for five years and we plan to produce and sell the music players for five years. Prepare the entry to
amortize the cost of the patent on Dec. 31st.
Copyrights On Jan. 2, 2007, Our Co. purchased a copyright for $15,000. Almost immediately, Our Co.
spends $72,000 to successfully defend the patent in a lawsuit. Prepare the entries to record these two events.
4. Copyrights What effect do the entries in the previous problem have on net income?
Effect on Net Income
Increase
Dollar effect (amount)
.
no effect
Decrease
5. Copyrights On Jan. 2, 2007, Our Co. purchased a copyright. Almost immediately, Our Co. spent
$72,000 attempting to defend the copyright in a lawsuit. Assume our legal defense is unsuccessful and
we loose the lawsuit. Prepare the entry to record this event.
6. Impairment We own a trademark that has a carrying value of $300,000. The trademark is issued for an
indefinite number of renewal periods of ten years each. The trademark is expected to generate royalty
income of $4,000 a year for the foreseeable future (more than ten years). The fair market value of the
trademark is estimated to be $325,000. Indicate whether or not the trademark is impaired and, if it is
impaired, prepare the necessary entry.
7. Impairment We own a patent that has a carrying value of $90,000 and four years remaining on its legal
life. The patent is expected to generate royalty income of $15,000 for each of the next five years. If
needed, the present value of the cash flows should be calculated using a 10% discount rate. Indicate
whether or not the trademark is impaired and, if it is impaired, prepare the necessary entry.
Lo
8. Impairment We own a patent that has a carrying value of $43,000 and five years remaining on its legal
life. The patent is expected to generate $10,000 for each of the next five years. If needed, the present
value of the cash flows should be calculated using a 10% discount rate. Indicate whether or not the
trademark is impaired and, if it is impaired, prepare the necessary entry.
9. Goodwill We are purchasing a company for $750,000. The company's balance sheet is shown on the left
below. The fair market values of its assets and liabilities are shown below on the right. Calculate the
amount of goodwill, if any, that we should record and prepare the necessary entry, to record the purchase.
Inventory
Land
Building
450,000
175,000
825,000
Balance Sheet
Accounts pay
700,000
Owners equity
750,000
Fair Market Values
Inventory
400,000
Land
150,000
Building
800,000
Accounts pay
700,000
10. Goodwill What effect did the entries in the previous problem have on net income?
Effect on Net Income
Increase
no effect
Decrease
Dollar effect (amount)
.
11. Impairment Goodwill We are testing for impairment of a wholly owned subsidiary. The balance sheet
for the subsidiary balance sheet is shown on the left below. The fair market value of the subsidiary
company is $1,000. The fair market values of its assets and liabilities are shown on the below on the
right. Determine whether goodwill is impaired and, if it is impaired, prepare the entry to record the
impairment of goodwill.
Inventory
Building
Goodwill
250
850
300
Balance Sheet
Accounts pay
350
Owners equity
1,050
Fair Market Values
Inventory
300
Building
950
Accounts pay
350
12. Impairment Goodwill We are testing for impairment of a wholly owned subsidiary. The balance sheet
for the subsidiary balance sheet is shown on the left below. The fair market value of the subsidiary
company is $1,500. The fair market values of its assets and liabilities are shown on the below on the
right. Determine whether goodwill is impaired and, if it is impaired, prepare the entry to record the
impairment of goodwill.
Inventory
Building
Goodwill
375
1,275
450
Balance Sheet
Accounts pay
525
Owners equity
1,575
Fair Market Values
Inventory
450
Building
1,425
Accounts pay
525
13. Research and Development We acquired two pieces of equipment: Equipment #1 for $300, and
Equipment #2 for $700. Equipment #1 will be used in numerous research project over the next few years.
Equipment #2 has several alternative uses. Prepare the entry to record these two acquisitions.
14. Software We begin selling a software package to external parties. The software has unamortized
capitalized software development costs of $12,000 and we estimate there will be a market for this
software for 4 years. Revenue from software sales was $10,000 during the first year. We estimate
revenue in the future years will total $14,000. Prepare the entry to record the amortization expense for
the first year.
Stockholders Equity
15. RIGHTS OF SHAREHOLDERS List the rights associated with each share of common stock, in the absence
of provisions to the contrary.
16. ISSUE COMMON STOCK MILLER MOTOR CO. incurred $61,000 in direct underwriting fees to issue
100,000 shares of $1 par value common stock for $8 per share. Prepare the entry to record this
transaction.
17. Lump Sum Sale MMC issued 50,000 shares of $1 par value common stock and 1,000 shares of $100
par value preferred stock as a package. They received $785,000. Prepare the entry if market value is $38
for the common stock and $115 for the preferred stock.
Preferred stock
100,000.00id in Capital -PS
3,050.19
18. NON CASH TRANSACTIONS MILLER MOTOR CO. issued 5,000 shares $100 par value 8% preferred stock
to purchase a building. The preferred stock recently traded for $105 because of the relatively high interest
rate. The building was recently appraised for $540,000. Prepare the entry to record this transaction.
TREASURY STOCK -COST METHOD (more room for answers on next page if needed)
common stock 100,000 shares PAR $1
additional paid in capital
retained earnings
100,000
750,000
980,000
19. Prepare the entry on 1/28/07 when MMC paid $20 per share to purchase 1,000 shares of treasury stock.
20. Prepare the entry on 5/5/07 when 100 shares of treasury stock are reissued for $22 per share.
21. Prepare the entry on 7/20/07 when 200 shares of treasury stock are reissued for $17 per share.
22. What effect did the entries in the previous problem (no 22) have on net income?
Effect on Net Income
DOLLAR EFFECT (AMOUNT) .
Increase
no effect
Decrease
23. Prepare the entry when 100 shares of the treasury stock are retired.
24. Dividends At what date, if ever, does a cash dividend become a liability.
on t
25. STOCK DIVIDENDS/SPLITS
Using the following information, prepare the journal entry, label the
accounts, and note any required changes to PAR value if the company were to declare a 20% stock
dividend when the stock was trading at $25.
Common Stock $1 PAR value - 100,000 shares outstanding
Capital Contributed is Excess of Par
Retained Earnings
100,000
400,000
570,000
26. STOCK DIVIDENDS/SPLITS
Using the following information, prepare the journal entry, label the
accounts, and note any required changes to PAR value if the company were to declare a 150% stock
dividend when the stock was trading at $10.
Common Stock $1 PAR value - 100,000 shares outstanding
Capital Contributed is Excess of Par
Retained Earnings
100,000
500,000
700,000
Retained
27. STOCK DIVIDENDS/SPLITS
Using the following information, prepare the journal entry, label the
accounts and note any required changes to PAR value if the company were to declare a 10% stock
dividend when the stock was trading at $10.
Common Stock $1 PAR value - 100,000 shares outstanding
Capital Contributed is Excess of Par
Retained Earnings
100,000
500,000
700,000
PREFERRED STOCK DIVIDENDS
Below is the owners' equity section of MMC balance sheet.
Common Stock $1 PAR value - 1,000,000 shares outstanding 1,000,000
6% Preferred Stock $100 PAR value - 5,000 shares outstanding 500,000
28. The preferred stock is cumulative. The company is two-years in arrears on preferred stock dividends. The
Board of Directors declares a $200,000 dividend. How much of this dividend will go to each group of
shareholders?
29.
30. The preferred stock is fully participating. This is a new problem; forget about the dividend in the
previous problem. There are no dividends in arrears. The Board of Directors declares a $150,000
dividend. How much of this dividend will go to each group of shareholders?