Question

Question: As the recently appointed auditor for Bryan Corporation, you have been asked to examine selected accounts before the 6-month financial statements of June 30, 2017, are prepared. The controller for Bryan Corporation mentions that only one account is kept for intangible assets. The account is shown below.

Intangible assets
	Debit	Credit	Balance
Jan. 4	Research and development costs	940,000		940,000
Jan. 5	Legal costs to obtain patent	75,000		1,015,000
Jan. 31	Payment of 7 months’ rent on property leased by Bryan	91,000		1,106,000
Feb. 11	Premium on common stock		250,000	856,000
March 31	Unamortized bond discount on bonds due March 31, 2037	84,000		940,000
April 30	Promotional expenses related to start-up of business	207,000		1,147,000
June 30	Operating losses for first 6 months	241,000		1,388,000

Instructions

Prepare the entry or entries necessary to correct this account. Assume that the patent has a useful life of 10 years.

Short answer

Journal entries are shown in step 1.

Step-by-step solution

Correcting journal entries

S. no.	Particulars	JF	Debit	Credit
1.	Research and development expense		940,000
	Patents		75,000
	Rent expenses		65,000
	Prepaid rent		26,000
	Advertising expense		207,000
	Income summary		241,000
	Discount on bonds payable		82,950
	Interest expense		1,050
	Paid capital in excess of par on common stock			250,000
	Intangible assets			1,388,000
	(Being various transactions recorded)
2.	Amortization Expense
	Patents (Accumulated Amortization)		3,750
	(accumulated amortization recorded)			3,750

Step 2- Calculation of Discount on bonds payable

$\begin{array}{rcl}\mathbf{84}\mathbf{,}\mathbf{000}\mathbf{÷}\mathbf{240}\mathbf{}\mathbf{months}& \mathbf{=}& \mathbf{\$}\mathbf{350}\\ & \mathbf{=}& \mathbf{\$}\mathbf{350}\mathbf{\times }\mathbf{3}\mathbf{=}\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{050}\\ & \mathbf{=}& \mathbf{\$}\mathbf{84}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{050}\mathbf{=}\mathbf{\$}\mathbf{82}\mathbf{,}\mathbf{950}\end{array}$

Step 3- calculation of Amortization expense:

$\begin{array}{rcl}\mathbf{Amortization}\mathbf{}\mathbf{Expense}& \mathbf{=}& \frac{\mathbf{Cost}\mathbf{}\mathbf{of}\mathbf{}\mathbf{Patent}}{\mathbf{Useful}\mathbf{}\mathbf{life}}\mathbf{\times }\mathbf{Number}\mathbf{}\mathbf{of}\mathbf{}\mathbf{}\mathbf{Months}\\ & \mathbf{=}& \frac{\mathbf{\$}\mathbf{75}\mathbf{,}\mathbf{000}}{\mathbf{10}}\mathbf{\times }\frac{\mathbf{6}}{\mathbf{12}}\\ & \mathbf{=}& \mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{750}\\ & & \end{array}$