Chapter 12: Q22. (page 610)
Explain why reclassification adjustments are necessary.
Reclassification adjustments are necessary because they help in the treatment of realized profit and gain.
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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
The following is selected information for Alatorre Company.
1. Alatorre purchased a patent from Vania Co. for \(1,000,000 on January 1, 2015. The patent is being amortized over its remaining legal life of 10 years, expiring on January 1, 2025. During 2017, Alatorre determined that the economic benefits of the patent would not last longer than 6 years from the date of acquisition. What amount should be reported in the balance sheet for the patent, net of accumulated amortization, at December 31, 2017?
2. Alatorre bought a franchise from Alexander Co. on January 1, 2016, for \)400,000. The carrying amount of the franchise on Alexander’s books on January 1, 2016, was \(500,000. The franchise agreement had an estimated useful life of 30 years. Because Alatorre must enter a competitive bidding at the end of 2018, it is unlikely that the franchise will be retained beyond 2025. What amount should be amortized for the year ended December 31, 2017?
3. On January 1, 2017, Alatorre incurred organization costs of \)275,000. What amount of organization expense should be reported in 2017?
4. Alatorre purchased the license for distribution of a popular consumer product on January 1, 2017, for $150,000. It is expected that this product will generate cash flows for an indefinite period of time. The license has an initial term of 5 years but by paying a nominal fee, Alatorre can renew the license indefinitely for successive 5-year terms. What amount should be amortized for the year ended December 31, 2017?
Instructions:
Answer the questions asked about each of the factual situations.
Question: On September 1, 2017, Winans Corporation acquired Aumont Enterprises for a cash payment of \(700,000. At the time of purchase, Aumont’s balance sheet showed assets of \)620,000, liabilities of \(200,000, and owners’ equity of \)420,000. The fair value of Aumont’s assets is estimated to be $800,000. Compute the amount of goodwill acquired by Winans.
Question: (Recording and Amortization of Intangibles) Marshall Company, organized in 2016, has set up a single account for all intangible assets. The following summary discloses the debit entries that have been recorded during 2017.
1/2/17 | Purchased patent (8-year life) | \( 350,000 |
4/1/17 | Purchase goodwill (indefinite life) | 360,000 |
7/1/17 | Purchased franchise with 10-year life; expiration date 7/1/27 | 450,000 |
8/1/17 | Payment of copyright (5-year life) | 156,000 |
9/1/17 | Research and development costs | 215,000 |
\)1,531,000 |
Instructions
Prepare the necessary entries to clear the Intangible Assets account and to set up separate accounts for distinct types of intangibles. Make the entries as of December 31, 2017, recording any necessary amortization and reflecting all balances accurately as of that date. (Use straight-line amortization.)
Franklin Corp. has a debt investment that it has held for several years. When it purchased the debt investment, Franklin classified and accounted for it as an available-for-sale. Can Franklin use the fair value option for this investment? Explain.
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