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Chapter 12: Q24Q. (page 637)

Recently, a group of university students decided to incorporate for the purposes of selling a process to recycle the waste product from manufacturing cheese. Some of the initial costs involved were legal fees and office expenses incurred in starting the business, state incorporation fees, and stamp taxes. One student wishes to charge these costs against revenue in the current period. Another wishes to defer these costs and amortize them in the future. Which student is correct?

Short Answer

Expert verified

The student who wishes to charge these costs against revenue in the current period is correct.

Step by step solution

01

Meaning of Initial Cost

The money necessary for the capital construction or refurbishment of a big facility is referred to as the initial cost.

02

Reason

These expenses are referred to as start-up costs or, in this case, organizational expenditures. Start-up expenditures are simple to account for: expend them when they are incurred. The profession understands that these expenses are made with the prospect of improved revenues or efficiency in the future. However, determining the amount and timing of future gains is so challenging that a conservative approach is required鈥攅xpending these expenditures as they are spent.

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Most popular questions from this chapter

Question: On September 1, 2017, Winans Corporation acquired Aumont Enterprises for a cash payment of \(700,000. At the time of purchase, Aumont鈥檚 balance sheet showed assets of \)620,000, liabilities of \(200,000, and owners鈥� equity of \)420,000. The fair value of Aumont鈥檚 assets is estimated to be $800,000. Compute the amount of goodwill acquired by Winans.

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.

Explain how the investment account is affected by investee activities under the equity method.

Question: Treasure Land Corporation incurred the following costs in 2017

Cost of laboratory research aimed at discovery of new knowledge

\(120,000

Cost of testing in search for product alternatives

\)100,000

Cost of engineering activity required to advance the design of a product to the manufacturing stage

\(210,000

\)430,000

Prepare the necessary 2017 journal entry or entries for Treasure Land.

Question: Where can authoritative IFRS guidance related to intangible assets be found?

See all solutions

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