INTERMEDIATE ACCOUNTING 322
TAD MILLER
TEST 01 10/13/06
INTANGIBLE ASSETS & STOCKHOLDERS' EQUITY
TEST 01. FALL 2006
for all journal entries, clearly label whether each account is an (A)sset, (L)iability, (O)wners' Equity, (R)evenue
or (E)xpense.
Intangible Assets
1. Characteristics of Intangible Assets Please list the main characteristics of intangible assets.
2. Financial Statement Presentation On which financial statement do goodwill and patents appear?
Describe their location on that financial statement.
3. Patents On Jan. 2, 2006, Our Co. purchased a patent for $64,000. The remaining legal life of the patent
is sixteen years. Our Co. believes the patent will be useful for 10 years. Prepare the entry to record the
purchase of the patent and also the entry to amortize the cost of the patent on Dec. 31st.
4. Patents 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. Patents On Jan. 2, 2006, Our Co. purchased a patent for $50,000. Almost immediately, Our Co. spends
$12,000 to successfully defend the patent in a lawsuit. Prepare the entries to record these two events.
6. Patents On Jan. 2, 2006, Our Co. purchased a patent for $50,000. Almost immediately, Our Co. spends
$12,000 to defend the patent in a lawsuit. Now assume we are unable to defend the patent and we loose
the lawsuit. Prepare the entries to record these two events.
7. Impairment We own a patent that has a carrying value of $430,000 and five years remaining on its legal
life. The patent is expected to generate $100,000 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
patent is impaired and prepare the necessary entry, if it is impaired.
8. Trademark We own a trademark that has a carrying value of $4,300,000 and an indefinite life. The
trademark is expected to generate royalty income of $430,000 a year for the foreseeable future (more
than ten years). The fair market value of the trademark is estimated to be $4,000,000. Indicate whether or
not the trademark is impaired and prepare the necessary entry, if it is impaired.
9.
Impairment We own a copyright that has a carrying value of $900,000 and four years remaining on its
legal life. The copyright is expected to generate royalty income of $200,000 for each of the next four
years. If needed, the present value of the cash flows should be calculated using a 10% discount rate.
Indicate whether or not the patent is impaired and prepare the necessary entry, if it is impaired.
10. Goodwill We are purchasing a company for $300,000. The company's balance sheet is shown on the left
below. The fair market values of its assets and liabilities are shown on the 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
240,000
40,000
155,000
Balance Sheet
Accounts pay
200,000
Own equity
235,000
Fair Market Values
Inventory
265,000
Land
60,000
Building
160,000
Accounts pay
200,000
11. Goodwill What effect did the entries in the previous problem have on net income?
Effect on Net Income
Increase
Dollar effect (amount)
.
no effect
Decrease
Impairment Goodwill We are testing for impairment. The balance sheet for a wholly owned subsidiary
company balance sheet is shown on the left below. The fair market value of the subsidiary company is $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
100
300
200
Balance Sheet
Accounts pay
150
Own equity
450
Fair Market Values
Inventory
100
Building
360
Accounts pay
150
12. Impairment Goodwill Similar example except the fair market value of the subsidiary company is now
$400. We are testing for impairment. The balance sheet for a wholly owned subsidiary company balance
sheet is shown on the left below. 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
100
300
200
Balance Sheet
Accounts pay
150
Own equity
450
Appraised Values
Inventory
Building
Accounts pay
100
360
150
13. Research and Development We acquired two pieces of equipment: Equipment #1 for $100, and
Equipment #2 for $200. Equipment #1 will be used in numerous research project over the next few years.
Equipment #2 will be used in a single research project and has no alternative uses. Prepare the entry to
record these two acquisitions.
14. Software We have completed development of software for internal use. We incurred $16,000 in costs
creating this software. We determine that $7,800 of those costs were prior to the application development
stage and $8,200 were during the application development stage. Prepare the entry(ies) we need to record
our software costs.
15. Software We have a software package we sell to external parties. The unamortized capitalized software
costs are $6,000 and we estimate there will be a market for this software for 4 years. During the first year,
revenue from software sales was $8,000. We estimate revenue in the future years will total $12,000
($20,000 total). Prepare the entry to record the amoritization expense for the first year.
Stockholders Equity
16. RIGHTS OF SHAREHOLDERS
provisions.
List the rights carried by each share of common stock, in the absence of
17. LIMITED LIABILITY When discussing corporate ownership, we often discuss limited liability. Describe
how limited liability protects stockholders from the unsatisfied claims against the corporation. Assume
the stock was issued at a price in excess of par value.
18. Lump Sum Sale MMC issued 5,000 shares of $1 par value common stock and 1,000 shares of $100 par
value preferred stock as a package. They received $300,000. Prepare the entry if market value is $38 for
the common stock and $115 for the preferred stock.
19. NON CASH TRANSACTIONS MILLER MOTOR CO. issued 1,000 shares of $1 par value common stock to
acquire land. MMC is a closely held family business and no shares have changed hands in over 5 years.
The land appraised for $1,230,000 just prior to this transaction. Prepare the entry to record this
transaction.
20. ISSUE COMMON STOCK MILLER MOTOR CO. issued 10,000 shares of $1 par value common stock for $20
per share. Prepare the entry to record this transaction, if Miller Motors incurred $16,000 in direct
underwriting fees to issue the stock.
TREASURY STOCK -COST METHOD On 1/28/06 MILLER MOTOR CO, paid $90 per share to purchase 600
shares of its $1 par value common stock to have available for stock options.
common stock 100,000 shares PAR $1
additional paid in capital
retained earnings
100,000
750,000
980,000
21. Prepare the entry on 1/28/06 when MMC paid $90 per share to purchase 600 shares of treasury stock.
22. Prepare the entry on 5/5/06 when 100 shares of treasury stock are reissued for $88 per share.
23. Prepare the entry on 7/20/06 when 100 shares of treasury stock are reissued for $95 per share.
24. Prepare the entry on 9/17/06 when 300 shares of treasury stock are reissued for $87 per share.
25. Goodwill What effect did the entries in the previous problem (no 25) have on net income?
Effect on Net Income
Increase
no effect
Decrease
DOLLAR EFFECT (AMOUNT) .
26. Prepare the entry when the remaining 100 shares of the treasury stock are retired.
27. LEGAL CAPITAL AND DIVIDENDS Please give a brief description of legal capital. I don't want you to
just tell me that it typically includes the Common Stock and Additional Paid in Capital accounts.
28. Dividends At what date, if ever, does a cash dividend become a liability.
29. 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
30. 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 100% 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
31. 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 2 for 1 stock split 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
PREFERRED STOCK DIVIDENDS
Below is the owners' equity section of MMC balance sheet.
Common Stock $1 PAR value - 10,000 shares outstanding
10,000
8% Preferred Stock $100 PAR value - 5,000 shares outstanding 500,000
32. The preferred stock is cumulative. The company is three-years in arrears on preferred stock dividends.
The Board of Directors declares a $150,000 dividend. How much of this dividend will go to each group
of shareholders?
33. 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 $100,000
dividend. How much of this dividend will go to each group of shareholders?