9-6A Due to rapid employee turnover in the accounting department, the following

Question

9-6A Due to rapid employee turnover in the accounting department, the following trans- actions involving intangible assets were improperly recorded by Inland Corporation. 1. Inland developed a new manufacturing process, incurring research and develop- ment costs of $160,000. The company also purchased a patent for $40,000. In early January, Inland capitalized $200,000 as the cost of the patents. Patent amortization expense of $10,000 was recorded based on a 20-year useful life. 2. On July 1, 2017, Inland purchased a small company and as a result recorded goodwill of s80,000. Inland recorded a half-year's amortization in 2017, based on a 20-year life ($2,000 amortization). The goodwill has an indefinite life. Instructions Prepare all journal entries necessary to correct any errors made during 2017. Assume the books have not yet been closed for 2017.

Explanation / Answer

According to IRS Section 197 of Internal Revenue Code(Amortization of goodwill and certain other intangibles), the amortization period is 15 years.

Section 197 intangibles include Goodwill and Patents(purchased as part of business).

Journal entries to correct errors made:

JOURNAL ENTRIES

Ref

Account Titles and explanation

Debit

Credit

1

Accumulated amortization

$10,000

Amortization expense

$10,000

(To reverse error in entry of patent amortization)

1

Amortization expense

$        13,333

(200000/15)

Accumulated amortization

$ 13,333

(To record patent amortization expense)

2

Accumulated amortization

$2,000

Amortization expense

$2,000

(To reverse error in entry of goodwill amortization)

Amortization expense

$          2,667

(80000/15)/2

Accumulated amortization

$    2,667

(To record goodwill amortization expense)

JOURNAL ENTRIES

Ref

Account Titles and explanation

Debit

Credit

1

Accumulated amortization

$10,000

Amortization expense

$10,000

(To reverse error in entry of patent amortization)

1

Amortization expense

$        13,333

(200000/15)

Accumulated amortization

$ 13,333

(To record patent amortization expense)

2

Accumulated amortization

$2,000

Amortization expense

$2,000

(To reverse error in entry of goodwill amortization)

Amortization expense

$          2,667

(80000/15)/2

Accumulated amortization

$    2,667

(To record goodwill amortization expense)

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