Due to rapid turnover in the accounting department, several transactions involving intangible assets were improperly recorded by Blossom Co. in the year ended December 31, 2021:
1. | Blossom developed a new manufacturing process early in the year, incurring research and development costs of $165,000. Of this amount, 45% was considered to be development costs that could be capitalized. Blossom recorded the entire $165,000 in the Patents account and amortized it using a 15-year estimated useful life. | |
2. | On July 1, 2021, Blossom purchased a small company and, as a result of the purchase, recorded goodwill of $410,000. Blossom recorded a half-year’s amortization on the goodwill in 2021 based on a 40-year useful life and credited the Goodwill account. | |
3. | Several years ago, Blossom paid $71,000 for a licence to be the exclusive Canadian distributor of a Danish beer. In 2018, Blossom determined there was an impairment of $41,000 in the value of the licence and recorded the loss. In 2021, because of a change in consumer tastes, the value of the licence increased to $81,000. Blossom recorded the $51,000 increase in the licence’s value by crediting Impairment Loss and debiting the Licence account. Management felt the company should consistently record increases and decreases in value. |
Assuming that Blossom reports under IFRS, prepare the journal
entries that are needed to correct the errors made during 2021.
(Credit account titles are automatically indented when
the amount is entered. Do not indent manually. If no entry is
required, select "No Entry" for the account titles and enter 0 for
the amounts. Round answers to 0 decimal places, e.g.
5,276.)
No. |
Account Titles and Explanation |
Debit |
Credit |
1. |
|||
(To correct patent error.) | |||
(To correct amortization.) | |||
2. |
|||
3. |
|||
1. Research Expense ($165,000 * 55%) Dr $90,750
To Patents $90,750
(To correct patent error)
Accumulated Amortization - Patents Dr $6,050
To Amortization Expense $6,050
$90,750/ 15 years = $6,050
(To correct amortization)
2. Accumulated Amortization - Goodwill Dr $5,125
To Amortization Expense $5,125
($410,000/ 40 years) * 6/12 = $5,125
(To correct amortization)
3. Impairment loss ($81,000 - $71,000) Dr $10,000
To License $10,000
(To correct the impairment loss)
The majority of intangible assets that are developed internally cannot be recognized as intangible assets on the balance sheet because the expenditures on internally deoeloped intangibles cannot be distinguished from the cost of other research and development performed by the business. The costs cannot be separately measured and must be expensed as incurred.
Due to rapid turnover in the accounting department, several transactions involving intangible assets were improperly recorded...
Due to rapid turnover in the accounting department, several transactions involving intangible assets were improperly recorded by Blossom Co. in the year ended December 31, 2021: 1. Blossom developed a new manufacturing process early in the year, incurring research and development costs of $165,000. Of this amount, 45% was considered to be development costs that could be capitalized. Blossom recorded the entire $165,000 in the Patents account and amortized it using a 15-year estimated useful life. 2. On July 1,...
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