Due to rapid turnover in the accounting department, the following transactions involving intangible assets were improperly recorded by Riley Co. in the year ended December 31, 2021:
Riley developed a new manufacturing process early in the year,
incurring research and development costs of $160,000. Of this
amount, 45% was considered to be development costs that could be
capitalized. Riley recorded the entire $160,000 in the Patents
account and amortized it using a 15-year estimated useful
life.
On July 1, 2021, Riley purchased a small company and, as a result
of the purchase, recorded goodwill of $400,000. Riley recorded a
half-year's amortization on the goodwill in 2021 based on a 40-year
useful life and credited the Goodwill account.
Several years ago, Riley paid $70,000 for a licence to be the
exclusive Canadian distributor of a Danish beer. In 2018, Riley
determined there was an impairment of $40,000 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 $80,000.
Riley recorded the $50,000 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 Riley Reports under IFRS, prepare the journal entries that are needed to correct the errors made during 2021.
The majority of intangible asssets reported on a balance sheet have been purchased as opposed to being internally generated. Why? WHat happens to the cost of an internally generated intangible asset if it is not recorded as an asset?
No | Accounts | debit | credit |
1 | Research Expense | 88000 | |
Patents | 88000 | ||
(160000*55%) | |||
Accumulated amortization-Patents | 5867 | ||
Amortization expense | 5867 | ||
(88000/15) | |||
2 | Accumulated amortization-Goodwill | 5000 | |
Amortization expense | 5000 | ||
(40000/40)*6/12 | |||
3 | Impairement Loss | 12500 | |
Trademark | 12500 | ||
(47500-35000) | |||
4 | Impairement Loss | 10000 | |
Licence | 10000 | ||
(47500-35000) | |||
Ques 2 |
Purchased intangible |
assets are capitalised instead of being |
expensed like internally generated |
assets. |
Since the costs cannot |
be separately measured for internally |
generated assets they must be expensed |
immediately |
Due to rapid turnover in the accounting department, the following transactions involving intangible assets were improper...
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