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-   -   How to prepare correct journal entry and ammortizing intangible assets? (https://www.askmehelpdesk.com/showthread.php?t=459702)

  • Mar 22, 2010, 11:11 PM
    gummiesweets
    How to prepare correct journal entry and ammortizing intangible assets?
    Due to rapid turnover in the accounting department, a number of transactions involving intangible assets were improperly recorded by Thorne Company in 2008.

    1. Thorne developed a new manufacturing process, incurring research and development cost of 136,000. The company also purchased a patent for 60,000 dollars. In early January, Thorne capitalized 196,000 dollars as the cost of the patents. Patent amortization expense of 9,800 was recorded based on a 20 year useful life.

    2. On July 1, 2008, Thorne purchased a small company and as a result acquired goodwill of $92,000. Thorne recorded a half-year's amortization in 2008, based on a 50-year life ($920 amortization). The goodwill has an indefinite life.

    Instructions:
    Prepare all journal entries necessary to correct any errors made during 2008. Assume the books have not yet been closed for 2008.

    Ok so what I got for the problem is:
    1. Debit Research and development expense for 136,000 and credit cash for 136,000. Next entry I debit patents for 60,000 and credit cash for 60,000. Then the Dec 31 entry I debit patents for 3,000 and credit patents for 3,000. I'm not sure what they mean by capitalized the amount as the cost of patents? Please help on this part.

    And for problem 2 I got:
    Debit Good will for 92,000 and credit Cash for 92,000. I don't think that's right.. please help!
  • Mar 23, 2010, 05:29 AM
    rehmanvohra

    Capitalizing means that the amount has been treated as an asset instead of expense.

    However, about your points:
    Quote:

    1. Thorne developed a new manufacturing process, incurring research and development cost of 136,000. The company also purchased a patent for 60,000 dollars. In early January, Thorne capitalized 196,000 dollars as the cost of the patents. Patent amortization expense of 9,800 was recorded based on a 20 year useful life.
    Expenses incurred on development of a new process can not be capitalized until certain criteria defined by the International Accounting Standard 38 - Intangible Assets.

    The correcting entry will be:

    Debit Research and Development Expenses 136,000
    Credit Patents 136,000

    Next you need to correct amortization recorded at 9.800. Your post does not state the entry made but it is usual to debit amortization expense and credit patent. The correcting entry will be:

    Debit Patent 6,800
    Credit Amortization expense 6.800

    As for the goodwill part, just reverse the amortization entry as the goodwill is stated to have an unlimited life. However, an impairment test must be carried out every year and if there is an impairment, it must be recorded as an impairment loss and credited to accumulated impairment losses.

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