Question

Data related to the acquisition of timber rights and intangible assets during the current year ended December 31 are as follows:

A.	Timber rights on a tract of land were purchased for $3,180,540 on February 22. The stand of timber is estimated at 5,214,000 board feet. During the current year, 1,125,600 board feet of timber were cut and sold.
B.	On December 31, the company determined that $4,023,000 of goodwill was impaired.
C.	Governmental and legal costs of $6,720,000 were incurred on April 3 in obtaining a patent with an estimated economic life of 12 years. Amortization is to be for three-fourths of a year.

Required:

1.	Determine the amount of the amortization, depletion, or impairment for the current year for each of the foregoing items.
2.	Journalize the adjusting entries required to record the amortization, depletion, or impairment for each item. Refer to the Chart of Accounts for exact wording of account titles.

Starting questions

1. Determine the amount of the amortization, depletion, or impairment for the current year for each of the items in the Instructions.

A.
B.
C.

Chart of Accounts

CHART OF ACCOUNTS

General Ledger

	ASSETS
110	Cash
111	Petty Cash
112	Accounts Receivable
114	Interest Receivable
115	Notes Receivable
116	Merchandise Inventory
117	Supplies
119	Prepaid Insurance
120	Land
123	Vehicles
124	Accumulated Depreciation-Vehicles
125	Equipment
126	Accumulated Depreciation-Equipment
130	Timber Rights
131	Accumulated Depletion
132	Goodwill
133	Patents

	LIABILITIES
210	Accounts Payable
211	Salaries Payable
213	Sales Tax Payable
214	Interest Payable
215	Notes Payable

	EQUITY
310	Owner's Capital
311	Owner's Drawing

	REVENUE
410	Sales
610	Interest Revenue
620	Gain on Sale of Vehicles
621	Gain on Sale of Equipment
622	Gain on Sale of Timber Rights
623	Gain from Sale of Goodwill

	EXPENSES
510	Cost of Merchandise Sold
520	Salaries Expense
521	Advertising Expense
522	Depreciation Expense-Vehicles
523	Delivery Expense
524	Repairs and Maintenance Expense
529	Selling Expenses
531	Rent Expense
532	Depreciation Expense-Equipment
533	Depletion Expense
534	Amortization Expense-Patents
535	Insurance Expense
536	Supplies Expense
539	Miscellaneous Expense
710	Interest Expense
720	Loss on Sale of Vehicles
721	Loss on Sale of Equipment
722	Loss on Sale of Timber Rights
723	Loss from Impaired Goodwill

Journal

2. Journalize the transactions and the adjusting entries on December 31 . Refer to the Chart of Accounts for exact wording of account titles. Scroll down to access pages 2 through 3 of the journal.

a. Timber rights on a tract of land were purchased for $3,180,540 on February 22. The stand of timber is estimated at 5,214,000 board feet. During the current year, 1,125,600 board feet of timber were cut and sold.

PAGE 1

JOURNAL

ACCOUNTING EQUATION

	DATE	DESCRIPTION	POST. REF.	DEBIT	CREDIT	ASSETS	LIABILITIES	EQUITY
1		Adjusting Entries
2
3

b. On December 31, the company determined that $4,023,000 of goodwill was impaired.

PAGE 2

JOURNAL

ACCOUNTING EQUATION

	DATE	DESCRIPTION	POST. REF.	DEBIT	CREDIT	ASSETS	LIABILITIES	EQUITY
1		Adjusting Entries
2
3

c. Governmental and legal costs of $6,720,000 were incurred on April 3 in obtaining a patent with an estimated economic life of 12 years. Amortization is to be for three-fourths of a year.

PAGE 3

JOURNAL

ACCOUNTING EQUATION

	DATE	DESCRIPTION	POST. REF.	DEBIT	CREDIT	ASSETS	LIABILITIES	EQUITY
1		Adjusting Entries
2
3

Answer 1

Answer:

	Answer-1:
(A)	Depletion expense = ($3,180,540/5,214,000) × 1,125,600 = $686,616
(B)	Loss from impaired goodwill = $4,023,000
(C)	Amortization expense = ($6,720,000/12) × 3/4 = $420,000
	Answer-2:
	Account Titles	Debit	Credit
(A)	Depletion expense	$      686,616
	Accumulated depletion		$       686,616
(B)	Loss from impaired goodwill	4,023,000
	Goodwill		4,023,000
(C)	Amortization expense-Patents	420,000
	Patents		420,000