Question

Long-term assets that are useful in the operations of a business, are not held for sale, and are without physical qualities. During the current year ended December 31 are as follows:

a. Timber rights on a tract of land were purchased for $3,461,120 on February 22. The stand of timber is estimated at 5,408,000 board feet. During the current year, 1,028,300 board feet of timber were cut and sold.
b. On December 31, the company determined that $3,640,000 of goodwill. An intangible asset that is created from such favorable factors as location, product quality, reputation, and managerial skill.
c. Governmental and legal costs of $6,108,000 were incurred on April 3 in obtaining a patent. Exclusive rights to produce and sell goods with one or more unique features.

Required:

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 required to record the amortization, depletion, or impairment for each item. Refer to the Chart of Accounts for exact wording of account titles.

Answer 1

Solution and Explanation:

1 Amount of depletion, impairment and amortization for the current year

A Cost of timber rights on a tract of land $3,461,120

Estimated stand of timber 5,408,000

Cost of depletion per board feet (3461120 divided by 5408000) $0.64

Current year depletion charges for 1,028,300 board feet $658,112

B Impairment loss $3,640,000

C Cost of Patent $6,108,000

Estimated economic life 10 years

Amortization period 3/4

Amortization
`(6108000 / 10 \text { year } * 3 / 4)` $458,100

2 Adjusting entries

Account Titles Debit Credit

a Depletion expense $658,112

Accumulated depletion $658,112

b Loss from Impaired Goodwill $3,640,000

Goodwill $3,640,000

c Amortization expense-Patents $458,100

Patents $458,100