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Chapter 12: 12-13BE (page 638)

Question: Indicate whether the following items are capitalized or expensed in the current year. (a) Purchase cost of a patent from a competitor. (c) Organizational costs. (b) Research and development costs. (d) Costs incurred internally to create goodwill.

Short Answer

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Answer

Particulars

Capitalized/Expensed

Purchase cost of a patent from a competitor

Capitalize

Research and development costs

Expense

Organizational costs

Expense

Costs incurred internally to create goodwill

Expense

Step by step solution

01

Meaning of Capitalization

The practice of depreciating the expenses of acquiring an asset throughout the asset's life, rather than the time the expense was incurred, is known as capitalization.

02

Meaning of Expensed Items

The cost of operations that a firm incursto earn revenue is an expense. "It costs money to make money," as the adage goes. Payments to suppliers, staff wages, factory leases, and equipment depreciation are common costs.

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Most popular questions from this chapter

Where on the asset side of the balance sheet are debt investments classified as trading securities, available-for-sale securities, and held-to-maturity securities reported? Explain.

The following is selected information for Alatorre Company.

1. Alatorre purchased a patent from Vania Co. for \(1,000,000 on January 1, 2015. The patent is being amortized over its remaining legal life of 10 years, expiring on January 1, 2025. During 2017, Alatorre determined that the economic benefits of the patent would not last longer than 6 years from the date of acquisition. What amount should be reported in the balance sheet for the patent, net of accumulated amortization, at December 31, 2017?

2. Alatorre bought a franchise from Alexander Co. on January 1, 2016, for \)400,000. The carrying amount of the franchise on Alexander鈥檚 books on January 1, 2016, was \(500,000. The franchise agreement had an estimated useful life of 30 years. Because Alatorre must enter a competitive bidding at the end of 2018, it is unlikely that the franchise will be retained beyond 2025. What amount should be amortized for the year ended December 31, 2017?

3. On January 1, 2017, Alatorre incurred organization costs of \)275,000. What amount of organization expense should be reported in 2017?

4. Alatorre purchased the license for distribution of a popular consumer product on January 1, 2017, for $150,000. It is expected that this product will generate cash flows for an indefinite period of time. The license has an initial term of 5 years but by paying a nominal fee, Alatorre can renew the license indefinitely for successive 5-year terms. What amount should be amortized for the year ended December 31, 2017?

Instructions:

Answer the questions asked about each of the factual situations.

Zoop Corporation purchased for \(300,000 a 30% interest in Murphy, Inc. This investment enables Zoop to exert significant influence over Murphy. During the year, Murphy earned net income of \)180,000 and paid dividends of $60,000. Prepare Zoop鈥檚 journal entries related to this investment.

Kenoly Corporation owns a patent that has a carrying amount of \(300,000. Kenoly expects future net cash flows from this patent to total \)210,000. The fair value of the patent is $110,000. Prepare Kenoly鈥檚 journal entry, if necessary, to record the loss on impairment.

Franklin Corp. has a debt investment that it has held for several years. When it purchased the debt investment, Franklin classified and accounted for it as an available-for-sale. Can Franklin use the fair value option for this investment? Explain.
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