Highlight Company purchases the right to use a piece of music from the original
ID: 2601384 • Letter: H
Question
Highlight Company purchases the right to use a piece of music from the original musician who created it. Officials hope to make this music the company’s “signature song.” Therefore, the contract (which is signed on January 1, Year One) is for four years. The agreed upon price is $800,000, with no stated interest rate to be paid. Highlight could borrow this amount of money at a 5 percent annual interest rate at the current time. The arrangement states that Highlight will make this $800,000 payment on December 31, Year Four.
a. Record the journal entry for Highlight for the acquisition of this copyright on January 1, Year One.
b. Record the adjusting entries to recognize interest expense and amortization expense on
December 31 of each of the subsequent four years.
c. Record the journal entry for the payment of the $800,000 on December 31, Year Four.
Explanation / Answer
Amortization of Copyrights is done mostly on straight line method and expected life period may be for 10 years or the life as per agreement
Copyright is $800000
Life is 4 years
Amortization p.a is Value of Copyright/Life=800000/4
=200000 p.a.
Calculation of Interest Expense
The repayment is done after four years
Interest rate is 5%
Interest expense p.a=800000*5%=$40000
Question a
Year one-January 1
Bank A/c Dr $800000
To Loan A/c $800000
(Being loan has been taken)
Copyright A/c Dr $800000
To Bank A/c $800000
(Being Copyright has been taken for four years)
Year one December 31
Amortization expense A/c Dr $200000
To Copyright A/c $200000
(Being Amortization expesne has been recorded)
Interest A/c Dr $40000
To Loan A/c $40000
(Being Interest expense has been recorded)
Profit and Loss A/c Dr $240000
To Interest A/c $40000
To Amortization Expense A/c $200000
(Being Interest and AMortization expense has been transferred to Profit and Loss A/c)
Year Two December 31
Amortization expense A/c Dr $200000
To Copyright A/c $200000
(Being Amortization expesne has been recorded)
Interest A/c Dr $40000
To Loan A/c $40000
(Being Interest expense has been recorded)
Profit and Loss A/c Dr $240000
To Interest A/c $40000
To Amortization Expense A/c $200000
(Being Interest and AMortization expense has been transferred to Profit and Loss A/c)
Year three December 31
Amortization expense A/c Dr $200000
To Copyright A/c $200000
(Being Amortization expesne has been recorded)
Interest A/c Dr $40000
To Loan A/c $40000
(Being Interest expense has been recorded)
Profit and Loss A/c Dr $240000
To Interest A/c $40000
To Amortization Expense A/c $200000
(Being Interest and AMortization expense has been transferred to Profit and Loss A/c)
Year 4 December 31
Amortization expense A/c Dr $200000
To Copyright A/c $200000
(Being Amortization expesne has been recorded)
Interest A/c Dr $40000
To Loan A/c $40000
(Being Interest expense has been recorded)
Profit and Loss A/c Dr $240000
To Interest A/c $40000
To Amortization Expense A/c $200000
(Being Interest and AMortization expense has been transferred to Profit and Loss A/c)
Loan A/c Dr $960000
To Bank A/c $960000
(Being loan has been repaid along with interest)
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