Chapter 12: Q17-17Q (page 610)
Question: Explain how the investment account is affected by investee activities under the equity method.
Answer:
According to the equity method, investments are recorded in the investment at the cost of the investment, but it is always adjusted when changes are made in the investee’s account.
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Merck and Johnson & Johnson
Question: Merck & Co., Inc. and Johnson & Johnson are two leading producers of healthcare products. Each has considerable assets, and each expends considerable funds each year toward the development of new products. The development of a new healthcare product is often very expensive, and risky. New products frequently must undergo considerable testing before approval for distribution to the public. For example, it took Johnson & Johnson 4 years and \(200 million to develop its 1-DAY ACUVUE contact lenses. Below are some basic data compiled from the financial statements of these two companies.
(all dollars in millions) | Johnson & Johnson | Merck |
Total assets | \)53,317 | \(42,573 |
Total revenue | 47,348 | 22,939 |
Net income | 8,509 | 5,813 |
Research and development expense | 5,203 | 4,010 |
Intangible assets | 11,842 | 2,765 |
Instructions
Izzy Inc. purchased a patent for $350,000 which has an estimated useful life of 10 years. Its pattern of use or consumption cannot be reliably determined. Prepare the entry to record the amortization of the patent in its first year of use.
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.
Explain how losses on impaired intangible assets should be reported in income.
Question: Indicate whether the following items are capitalized or expensed in the current year. (a) Purchase cost of a patent from a competitor. (c) Organizational costs. (b) Research and development costs. (d) Costs incurred internally to create goodwill.
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