Solutions Guide: Please reword the answers to essay type parts so as to guarantee that your answer is an original. Do not submit as is
1)What are the criteria for classifying an item as a current liability? What are some examples of current liabilities?
Current liabilities are obligations whose liquidation is reasonably expected to require use of existing resources properly classified as current assets or the creation of other current liabilities. Some examples of current liabilities are accounts payable, taxes payable, unearned revenues, and wages payable.
2)What is a contingency in general?What is an accounting contingency?
Exposure to risks of loss resulting from uninsured past injury to others, however,
is an existing condition involving uncertainty about the amount and timing of
losses that may develop. In such a case, a contingency exists.
A contingency is defined in FASB Statement No. 5 as an existing condition, situation, or set of circumstances involving uncertainty as to possible gain (gain contingency) or loss (loss contingency) to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur.
3)What is a bond?
A bond represents a promiseto pay: (1) a sum of money at a designated maturity date, plus (2) periodic interest at a specifiedrate on the maturity amount (face value).
P12-1 (Correct Intangible Asset Account) Esplanade Co., organized in 2006, has set up a single account
for all intangible assets. The following summary discloses the debit entries that have been recorded during
2006 and 2007.
Intangible Assets
7/1/06 8-year franchise; expiration date 6/30/14 $ 42,000
10/1/06 Advance payment on laboratory space (2-year lease) 28,000
12/31/06 Net loss for 2006 including state incorporation fee, $1,000,
and related legal fees of organizing, $5,000 (all fees
incurred in 2006) 16,000
1/2/07 Patent purchased (10-year life) 74,000
3/1/07 Cost of developing a secret formula (indefinite life) 75,000
4/1/07 Goodwill purchased (indefinite life) 278,400
6/1/07 Legal fee for successful defense of patent purchased above 12,650
9/1/07 Research and development costs 160,000
Instructions
Prepare the necessary entries to clear the Intangible Assets account and to set up separate accounts fordistinct types of intangibles. Make the entries as of December 31, 2007, recording any necessary amortizationand reflecting all balances accurately as of that date. (Ignore income tax effects.)
Franchises / 42,000Prepaid Rent / 28,000
Organization Expense ($1,000 + $5,000) / 6,000
Retained Earnings ($16,000 – $6,000) / 10,000
Patents ($74,000 + $12,650) / 86,650
Research and Development Expense
($75,000 + $160,000) / 235,000
Goodwill / 278,400
Intangible Assets / 686,050
Franchise Amortization Expense ($42,000 8) / 5,250
Retained Earnings ($42,000 8 X 6/12) / 2,625
Franchises / 7,875
Rent Expense ($28,000 2) / 14,000
Retained Earnings ($28,000 2 X 3/12) / 3,500
Prepaid Rent / 17,500
Patent Amortization Expense / 8,170
Patents / 8,170
($74,000 10) + ($12,650 X 7/115)
Goodwill Amortization Expense / 5,220
Goodwill ($278,400 40 X 9/12) / 5,220