PR 9-6bAmortization and depletion entries
Data related to the acquisition of timber rights and intangible assets during the current year ended December 31 are as follows:
a. On December 31, the company determined that $3,400,000 of goodwill was impaired.
b. Governmental and legal costs of $4,800,000 were incurred on September 30 in obtain- ing a patent with an estimated economic life of eight years. Amortization is to be for one-fourth year.
c. Timber rights on a tract of land were purchased for $2,975,000 on February 4. The stand of timber is estimated at 12,500,000 board feet. During the current year, 4,150,000 board feet of timber were cut and sold.
Instructions
1. Determine the amount of the amortization, depletion, or impairment for the current year for each of the foregoing items.
2. Journalize the adjusting entries to record the amortization, depletion, or impairment for each item.
To solve this problem, we need to determine the amount of amortization, depletion, or impairment for each item and then journalize the adjusting entries to record these amounts.
1. Amortization, depletion, or impairment for each item:
a. Goodwill impairment:
Since $3,400,000 of goodwill was impaired, the entire amount will be recorded as impairment.
b. Patent amortization:
The patent has an estimated economic life of 8 years, and amortization is to be done for one-fourth year. This means that the patent's amortizable life for the current year is 8/4 = 2 years.
The amortization amount can be calculated as:
Amortization amount = Cost of patent / Amortizable life
Amortization amount = $4,800,000 / 2
Amortization amount = $2,400,000
c. Timber depletion:
To determine the amount of timber depletion, we need to calculate the depletion rate per board foot.
Depletion rate = Cost of timber rights / Estimated board feet
Depletion rate = $2,975,000 / 12,500,000
Depletion rate = $0.238 per board foot
The depletion amount can now be calculated using the depletion rate:
Depletion amount = Depletion rate x Number of board feet cut and sold
Depletion amount = $0.238 x 4,150,000
Depletion amount = $986,700
2. Journalizing the adjusting entries:
a. Goodwill impairment:
Adjusting entry:
Impairment Loss Expense 3,400,000
Goodwill 3,400,000
b. Patent amortization:
Adjusting entry:
Amortization Expense—Patent 2,400,000
Patent 2,400,000
c. Timber depletion:
Adjusting entry:
Depletion Expense 986,700
Accumulated Depletion 986,700
These adjusting entries record the amortization, depletion, or impairment for each item. Remember to check if there are any specific accounts mentioned in the instructions that need to be used in the adjusting entries.
Goodwill 3600000
Amortazation 162500