Assignment
I. (Accounting for R&D Costs) Price Company from time to time embarks on a research program when a special project seems to offer possibilities. In 2016, the company expends $325,000 on a research project, but by the end of 2016 it is impossible to determine whether any benefit will be derived from it.
Instructions
(a) What account should be charged for the $325,000 and how should it be shown in the financial statements?
(b) The project is completed in 2017 and a successful patent is obtained. The R&D costs to complete the project are $110.000. The administrative and legal expenses incurred in obtaining patent number 472-1001-84 in 2017 total $16,000. The patent has an expected useful life of 5 years. Record these costs in journal entry form. Also, record patent amortization (full year) in 2017.
(e) In 2018, the company successfully defends the patent in extended litigation at a cost of $47,200, thereby extending the patent life to December 31, 2025. What is the proper way to account for this cost? Also, record patent amortization (full year) in 2018.
(d) Additional engineering and consulting costs incurred in 2018 required to advance the design of a product to the manufacturing stage total $60,000. These costs enhance the design of the product considerably. Discuss the proper accounting treatment for this cost.
II. GROUPWORK (Goodwill, Impairment)
On July 31, 2017, Mexico Company paid $3,000,000 to acquire all of the common stock of Conchita Incorporated, which became a division of Mexico. Conchita reported the following balance sheet at the time of the acquisition.
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Current assets
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$ 800,000
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Current liabilities
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$ 600,000
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Noncurrent assets
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2,700,000
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Long-term liabilities
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soo.000
|
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Total assets
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$35W.000
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Stockholders' equity
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2,400,000
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|
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Total liabilities and stockholders' equity
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$3,500.000
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It was determined at the date of the purchase that the fair value of the identifiable net assets of Conchita was $2,750,000. Over the next 6 months of operations, the newly purchased division experienced operating losses. In addition, it now appears that it will generate substantial losses for the foreseeable future. At December 31, 2037, Conchita reports the following balance sheet information.
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Current assets
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$ 450,000
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|
Noncurrent assets (including goodwill recognized in purchase)
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2,400,000
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Current liabilities
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(700.000)
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Long-term liabilities
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(500,000)
|
|
Net assets
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$1.65o.000
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It is determined that the fair value of the Conchita Division is $3,85o.000. The recorded amount for Conchita's net assets (excluding goodwill) is the same as fair value, except for property, plant, and equipment, which has a fair value $150,000 above the carrying value.
Instructions
(a) Compute the amount of goodwill recognized, if any, on July 31, 2017.
(b) Determine the impairment loss, if any, to be recorded on December 31, 2017.
(c) Assume that fair value of the Conchita Division is $1,600,000 instead of $1,850,000. Determine the impairment loss, if any, to be recorded on December 31, 2017.
(d) Prepare the journal entry to record the impairment loss, if any, and indicate where the loss would be reported in the income statement.