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    Prepare journal entries for depreciation and amortization

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    A company purchased a new factory machine for $650,000. The machine is expected to be productive for 5 years and, at the end of the 5 years, it is expected to be worth $50,000 in salvage value. The machine manufactures widgets and is expected to produce 5 million widgets over its productive life.

    As it eventually turned out, the machine actually was used productively for 6 years and then sold at the beginning of year 7. Over its life, the machine actually produced the following widgets per year:

    Year Widgets Produced

    1 900,000
    2 1,200,000
    3 1,000,000
    4 1,400,000
    5 1,200,000
    6 1,300,000

    The machine was placed in service at the beginning of year 1 and was used until the end of year 6. It was sold on January 1 of year 7 for $45,000 cash. The company ends its accounting year on December 31.


    1) Prepare the journal entries to record the depreciation expense for year 4 under each of the following assumptions:

    a) Straight line
    b) Double declining
    c) Units of production
    d) Sum-of-the-years' digits


    The Crystal Ball Manufacturing Company purchased a sophisticated crystal ball polishing machine on January 1, 2008 for a total of $200,000. The machine was expected to be useful for 6 years and then have a salvage value of $20,000 at the end of its useful life.

    On September 30, 2012, due to lower than anticipated usage, it was determined that the machine would likely function satisfactorily for an additional 2 years longer than its originally expected useful life. However, the estimate of salvage value was reduced to $10,000.

    The company uses straight line depreciation.

    The company ends its accounting year on December 31 and records depreciation expense each year at the end of the year.


    Prepare the journal entries necessary to record depreciation expense for 2012, including any entries necessary to correct prior years' depreciation.


    In 2012, the Really Red Company (RRC) entered into the following transactions.
    1. On January 1 RRC purchased the rights to publish the autobiography of Fred Flintstone for a total cost of $150,000. The right expires on December 31, 2020. The company recorded the transaction with a debit to 'Acquired Assets - Intangible' and a credit to 'Cash'.

    2. On March 1 RRC acquired the Fly-By-Night Delivery Company for $750,000. As determined at the time of the acquisition, the net fair market value of Fly-By-Night assets were $550,000. The transaction was recorded with a debit to Equipment of $550,000; a debit to Acquired Assets - Intangibles of $200,000; and a credit to Cash of $750,000.

    3. On June 1 RRC purchased a franchise for $300,000 cash. The franchise is called 'Clip Joint' and specializes in selling only paperclips of various sizes, shapes and colors. RRC's management is convinced that if a company can make billions by convincing the public that they should pay $4.50 for a cup of coffee, the public will go for paperclips. The franchise authorized RRC to operate a Clip Joint store for 5 years after which a new franchise fee must be paid to continue to operate the store. RRC record the transaction with a Debit to Acquired Assets - Intangibles and a credit to Cash.

    4. During the year, with an eye towards improving the paperclip business, RRC spent $800,000 working on a new and revolutionary paperclip design. RRC is convinced that this new paperclip will be an instant, global wide phenomenon on the scale of pet rocks and the pocket fisherman. And, because they are so sure of this idea, they have recorded the expenditures with a debit to Acquired Assets - Intangibles and a credit to Cash. As of the end of the year, they are still working on the idea and management is absolutely sure that it will be a profitable undertaking.

    5. On October 1 RRC purchased a patent on a thermometer made out of a glass tube filled with liquid and with colored balls inside that isn't very accurate but looks interesting. The cost of the patent was $2,000,000 and was paid in cash. The patent has a 16 year remaining life. RRC recorded the purchase with a debit to Acquired Assets - Intangibles and a credit to Cash.

    RRC ends its accounting year on December 31.

    RRC uses the straight-line method of amortization for intangible assets.

    As of December 31, 2012, the net book value of the assets acquired in the Fly-By-Night Delivery Company acquisition was $225,000 less than their fair market value.


    1. Properly record each item in its proper account to clear the Acquired Assets - Intangibles account with the appropriate journal entries.

    2. Prepare journal entries, if any, to record amortization expense for 2012.

    3. Prepare a schedule showing the balance in each intangible asset account that should be shown on the balance sheet as of December 31, 2012.


    During 2006, a company spent $140,000 in research and development costs that resulted in a new product. The new product was patented at a total cost of $14,000 including $3,000 in attorney fees and a $500 patent office filing fee. The patent was expected to have a useful life of 8 years.

    In 2007, the company successfully defended a patent infringement lawsuit at a total cost of $8,000.

    In 2008, the company determined that other products introduced into the market reduced the useful life of the patent and estimated that the patent would become worthless by the end of 2010.


    Prepare all journal entries necessary to properly record all entries related to the product and patent for the years 2006 through 2010.

    Assume that the company's policy is to record full year's amortization each year.

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    Solution Summary

    The solution helps prepare journal entries for depreciation and amortization.