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    Correct Intangible Asset Account Including Adjusting Entries

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    (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

    Hint: (LO 2 and LO 3)


    Prepare the necessary entries to clear the Intangible Assets account and to set up separate accounts for distinct types of intangibles. Make the entries as of December 31, 2007, recording any necessary amortization and reflecting all balances accurately as of that date. (Ignore income tax effects.)

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    Solution Preview

    See Excel attached.

    Esplanade Co
    Adjusting Journal Entries
    Description Debit Credit

    Limited Life Intangible Assets - franchise 42,000
    Intangible assets 42,000
    Amortization of intangible asset 5,250
    Prior period adjustment 2,625
    Accumulated amortization - franchise 7,875
    To reclassify the franchise and expense the used up portion. Prior period
    adjustment is the 2006 portion (and not a current year expense).

    Prepaid Rents 28,000
    Intangible assets 28,000
    Rent (or lease) expense 14,000 ...

    Solution Summary

    The solution includes a series of entries which reclassify every item in the intangible account. Included with the reclass portion of the entries are the adjusting entries to expense portions of the intangibles which hadn't been done in 2006 and 2007. Each entry is followed with an explanation.