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Chapter 12: Q15E (page 643)

Question: (Accounting for Organization Costs) Angelou Corporation was organized in 2016 and began operations at the beginning of 2017. The company is involved in interior design consulting services. The following costs were incurred prior to the start of operations.

Attorney fees in connection with organization of the company

\(15,000

Purchase of drafting and design equipment

10,000

Costs of meetings of incorporators to discuss organizational activities

7,000

State filing fees to incorporate

1,000

\)33,000

Instructions

  1. Compute the total amount of organization costs incurred by Angelou.
  2. Prepare the journal entry to record organization costs for 2017.

Short Answer

Expert verified

Answer

  1. Total organization cost = $23,000
  2. Organization cost account should be debited, and the cash account should be credited.

Step by step solution

01

Meaning of Organization costs 

Organizational expenses are those expenses that are associated with the setup of a firm. The cost of a survey linked with an evaluation of possible markets, educating personnel in their new roles, and legal expenditures to form bylaws and articles of incorporation are some transactions that are included in organizational costs (for a corporation).

02

(a) Computation of the total amount of organization costs incurred by Angelou

Attorney鈥檚 fees in connection with the organization of the company

$15,000

Costs of meetings of incorporators to discuss organizational activities

7,000

State filing fees to incorporate

1,000

Total organization costs

$23,000

Drafting and design equipment, $10,000, should be classified as part of fixed assets rather than as organization costs.

03

(b) Preparing journal entries to record organization costs for 2017.

Date

Particular

Debit ($)

Credit ($)

Organization Expense

23,000

Cash (Payables)

23,000

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Most popular questions from this chapter

Hiram Co. uses the equity method to account for investments in common stock. What accounting should be made for dividends received from these investments subsequent to the date of investment?

Question: (Goodwill, Impairment) On July 31, 2017, Mexico Company paid \(3,000,000 to acquire all of the common stock of Conchita Incorporated, which became a division of Mexico. Conchita reported the following balance sheet at the time of the acquisition.

Current assets

\) 800,000

Current liabilities

\( 600,000

Noncurrent assets

2,700,000

Long-term liabilities

500,000

Total assets

\)3,500,000

Stockholders鈥� equity

2,400,000

Total liabilities and stockholders鈥� equity

\(3,500,000

It was determined at the date of the purchase that the fair value of the identifiable net assets of Conchita was \)2,750,000. Over the next 6 months of operations, the newly purchased division experienced operating losses. In addition, it now appears that it will generate substantial losses for the foreseeable future. At December 31, 2017, Conchita reports the following balance sheet information.

Current assets

\( 450,000

Noncurrent assets (including goodwill recognized in purchase)

2,400,000

Current liabilities

(700,000)

Long-term liabilities

(500,000)

Net assets

\)1,650,000

It is determined that the fair value of the Conchita Division is \(1,850,000. The recorded amount for Conchita鈥檚 net assets (excluding goodwill) is the same as fair value, except for property, plant, and equipment, which has a fair value \)150,000 above the carrying value.

Instructions

  1. Compute the amount of goodwill recognized, if any, on July 31, 2017.
  2. Determine the impairment loss, if any, to be recorded on December 31, 2017.
  3. Assume that fair value of the Conchita Division is \(1,600,000 instead of \)1,850,000. Determine the impairment loss, if any, to be recorded on December 31, 2017.

Prepare the journal entry to record the impairment loss, if any, and indicate where the loss would be reported in the income statement.

What constitutes 鈥渟ignificant influence鈥� when an investor鈥檚 financial interest is below the 50% level?

Why does the accounting profession make a distinction between internally created intangibles and purchased intangibles?

(Comprehensive Intangible Assets) Montana Matt鈥檚 Golf Inc. was formed on July 1, 2016, when Matt Magilke purchased the Old Master Golf Company. Old Master provides video golf instruction at kiosks in shopping malls. Magik plans to integrate the instructional business into his golf equipment and accessory stores. Magik paid \(770,000 cash for Old Master. At the time, Old Master鈥檚 balance sheet reported assets of \)650,000 and liabilities of \(200,000 (thus owners鈥� equity was \)450,000). The fair value of Old Master鈥檚 assets is estimated to be \(800,000. Included in the assets is the Old Master trade name with a fair value of \)10,000 and copyright on some instructional books with a fair value of \(24,000. The trade name has a remaining life of 5 years and can be renewed at nominal cost indefinitely. The copyright has a remaining life of 40 years.

Instructions

  1. Prepare the intangible assets section of Montana Matt鈥檚 Golf Inc. on December 31, 2016. How much amortization expense is included in Montana Matt鈥檚 income for the year ended December 31, 2016? Show all supporting computations.
  2. Prepare the journal entry to record amortization expenses for 2017. Prepare the intangible assets section of Montana Matt鈥檚 Golf Inc. on December 31, 2017. (No impairments are required to be recorded in 2017.)
  3. At the end of 2018, Magilke is evaluating the results of the instructional business. Due to fierce competition from online and television (e.g., the Golf Channel), the Old Master reporting unit has been losing money. Its book value is now \)500,000. The fair value of the Old Master reporting unit is \(420,000. The implied value of goodwill is \)90,000. Magik has collected the following information related to the company鈥檚 intangible assets.

Intangible Asset

Expected Cash Flows (undiscounted)

Fair value

Trade names

\( 9,000

\) 3,000

Copyrights

30,000

25,000

Prepare the journal entries required, if any, to record impairments on Montana Matt鈥檚 intangible assets. (Assume that any amortization for 2018 has been recorded.) Show supporting computations.
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