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Chapter 12: Q19Q (page 610)

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?

Short Answer

Expert verified

Distribution of dividends to investors leads reduction in the equity investment account.

Step by step solution

01

Definition of investment account

The investment account is an account that keeps a record of all types of securities.

02

Accounting treatment

The investment account is affected by the earnings and losses of the investee account. Whenever the investors receive their dividend, the investment account is reduced by the dividend amount. Hence, this transaction reduces the balance of the investment account.

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Most popular questions from this chapter

(Accounting for R&D Costs) In 2015, Wright Tool Company purchased a building site for its proposed research and development laboratory at a cost of \(60,000. Construction of the building was started in 2015. The building was completed on December 31, 2016, at a cost of \)320,000 and was placed in service on January 2, 2017. The estimated useful life of the building for depreciation purposes was 20 years. The straight-line method of depreciation was to be employed, and there was no estimated residual value.

Management estimates that about 50% of the projects of the research and development group will result in long-term benefits (i.e., at least 10 years) to the corporation. The remaining projects either benefit the current period or are abandoned before completion. A summary of the number of projects and the direct costs incurred in conjunction with the research and development activities for 2017 appears below.

Number of Projects

Salaries and Employee Benefits

Other Expenses (excluding Building Depreciation Charges)

Completed projects with long-term benefits

15

\( 90,000

\)50,000

Abandoned projects or projects that benefit the current period

10

65,000

15,000

Projects in process鈥攔esults indeterminate

5

40,000

12,000

Total

30

\(195,000

\)77,000

Upon recommendation of the research and development group, Wright Tool Company acquired a patent for manufacturing rights at a cost of $88,000. The patent was acquired on April 1, 2016, and has an economic life of 10 years.

Instructions

If generally accepted accounting principles were followed, how would the items above relating to research and development activities be reported on the following financial statements?

(a) The company鈥檚 income statement for 2017.

(b) The company鈥檚 balance sheet as of December 31, 2017.

Be sure to give account titles and amounts, and briefly justify your presentation.

Question: (Accounting for Patents) On June 30, 2017, your client, Ferry Company, was granted two patents covering plastic cartons that it had been producing and marketing profitably for the past 3 years. One patent covers the manufacturing process, and the other covers the related products.

Ferry executives tell you that these patents represent the most significant breakthrough in the industry in the past 30 years. The products have been marketed under the registered trademarks Evertight, Duratainer, and Sealrite. Licenses under the patents have already been granted by your client to other manufacturers in the United States and abroad, and are producing substantial royalties.

On July 1, Ferry commenced patent infringement actions against several companies whose names you recognize as those of substantial and prominent competitors. Ferry鈥檚 management is optimistic that these suits will result in a permanent injunction against the manufacture and sale of the infringing products as well as collection of damages for loss of profits caused by the alleged infringement.

The financial vice president has suggested that the patents be recorded at the discounted value of expected net royalty receipts.

Instructions

  1. What is the meaning of 鈥渄iscounted value of expected net receipts鈥�? Explain.
  2. How would such a value be calculated for net royalty receipts?
  3. What basis of valuation for Ferry鈥檚 patents would be generally accepted in accounting? Give supporting reasons for this basis.
  4. Assuming no practical problems of implementation and ignoring generally accepted accounting principles, what is the preferable basis of valuation for patents? Explain.
  5. What would be the preferable theoretical basis of amortization? Explain.
  6. What recognition, if any, should be made of the infringement litigation in the financial statements for the year ending September 30, 2017? Discuss.

Question: (Accounting for Patents) Tones Industries has the following patents on its December 31, 2016, balance sheet.

Patent Item

Initial Cost

Date Acquired

Useful Life at Date Acquired

Patent A

\(30,600

3/1/13

17 years

Patent B

\)15,000

7/1/14

10 years

Patent C

\(14,400

9/1/15

4 years

The following events occurred during the year ended December 31, 2017.

  1. Research and development costs of \)245,700 were incurred during the year.
  2. Patent D was purchased on July 1 for \(36,480. This patent has a useful life of 9陆 years.
  3. As a result of reduced demands for certain products protected by Patent B, a possible impairment of Patent B鈥檚 value may have occurred at December 31, 2017. The controller for Tones estimates the expected future cash flows from Patent B will be as follows.

    Year

    Expected Future Cash Flows

    2018

    \)2,000

    2019

    2,000

    2020

    2,000

  4. The proper discount rate to be used for these flows is 8%. (Assume that the cash flows occur at the end of the year.)

    Instructions

    1. Compute the total carrying amount of Tones鈥� patents on its December 31, 2016, balance sheet.
    2. Compute the total carrying amount of Tones鈥� patents on its December 31, 2017, balance sheet.

Margaret Avery Company from time to time embarks on a research program when a special project seems to offer possibilities. In 2015, the company expends \(325,000 on a research project, but by the end of 2015, it is impossible to determine whether any benefit will be derived from it.

  1. What account should be charged for the \)325,000, and how should it be shown in the financial statements?
  2. The project is completed in 2016, and a successful patent is obtained. The R&D costs to complete the project are \(130,000 (\)36,000 of these costs were incurred after achieving economic viability). The administrative and legal expenses incurred in obtaining patent number 472-1001-84 in 2016 total \(24,000. The patent has an expected useful life of 5 years. Record these costs in the journal entry form. Also, record patent amortization (full year) in 2016.
  3. In 2017, the company successfully defends the patent in extended litigation at a cost of \)47,200, thereby extending the patent life to December 31, 2024. What is the proper way to account for this cost? Also, record patent amortization (full year) in 2017.
  4. Additional engineering and consulting costs incurred in 2017 required to advance the design of a new version of the product to the manufacturing stage total $60,000. These costs enhance the design of the product considerably, but it is highly uncertain if there will be a market for the new version of the product. Discuss the proper accounting treatment for this cost.


Question: (Accounting for Trade Name) In early January 2016, Outkast Corporation applied for a trade name, incurring legal costs of \(16,000. In January 2017, Outkast incurred \)7,800 of legal fees in a successful defense of its trade name.

Instructions

  1. Compute 2016 amortization, 12/31/16 book value, 2017 amortization, and 12/31/17 book value if the company amortizes the trade name over 10 years.
  2. Compute the 2017 amortization and the 12/31/17 book value, assuming that at the beginning of 2017, Outkast determines that the trade name will provide no future benefits beyond December 31, 2020.
  3. Ignoring the response for part (b), compute the 2018 amortization and the 12/31/18 book value, assuming that at the beginning of 2018, based on new market research, Outkast determines that the fair value of the trade name is \(15,000. Estimated total future cash flows from the trade name is \)16,000 on January 3, 2018.
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