## Question

For each of the following unrelated transactions, (a) determine the amount of the amortization expense for the current year, and (b) present the adjusting entries required to record each expense at year end.
(1)Timber rights were purchased on a tract of land for \$600,000. The timber is estimated at 2,800 cubic metres. During the current year, 180 cubic metres of timber were cut and sold.

(2)A company purchased another company on July 1 and recorded goodwill of \$400,000.

(3)Costs of \$18,000 were incurred on January 1 to obtain a patent. Shortly thereafter, \$9,000 was spent in legal costs to successfully defend the patent against competitors. The patent has a legal life of 20 years and an estimated 9-year useful life.

5 years ago - 1 answers

(1) Timber rights were purchased on a tract of land for \$600,000. The timber is estimated at 2,800 cubic metres. During the current year, 180 cubic metres of timber were cut and sold.
(a)
Amortisation per cubic metre = \$600,000/2,800 = \$214.29
So for the current year, amortization expense = 180 x \$214.29 = \$38,572.22
(b)
Dr amortization expense \$38,572.22
Cr Accumulated amortization \$38,572.22

(2) A company purchased another company on July 1 and recorded goodwill of \$400,000
Goodwill from business combinations is not amortized. An impairment test must be carried out annually.

(3) Costs of \$18,000 were incurred on January 1 to obtain a patent. Shortly thereafter, \$9,000 was spent in legal costs to successfully defend the patent against competitors. The patent has a legal life of 20 years and an estimated 9-year useful life
(a)
Since the defence was successful, the legal costs can be capitalised to patents too. Total patents cost \$27,000. Patents are amortized over their legal or useful life, whichever is the shorter.
\$27,000/9 = \$3,000
(b)
Dr Patents amortization \$3,000
Cr Accumulated amortization \$3,000

5 years ago