Intangibles. Sorenson Manufacturing Corporation was incorporated on January 3, 2

Question

Intangibles. Sorenson Manufacturing Corporation was incorporated on January 3, 2016. The corporation's financial statements for its first year's operations were not examined by a CPA. You have been engaged to audit the financial statements for the year ended December 31, 2017, and your work is substantially completed. A partial trial balance of the company's accounts follows: SORENSON MANUFACTURING CORPORATION Trial Balance at December 31, 2017 Debit Credit Cash Accounts receivable Allowance for doubtful accounts Inventories Machinery Equipment Accumulated depreciation Patents Leasehold improvements Prepaid expenses Organization expenses Goodwill Licensing Agreement No. 1 Licensing Agreement No. 2* $11,000 42,580 $ 500 38,500 75,880 29,00018,000 85,800 26,800 10,500 29,000 24,000 50,000 49,08 es An intangible asset representing the right to use a patent The following information relates to accounts that may yet require adjustment 1. Patents for Sorenson's manufacturing process were purchased January 2, 2017, at a cost of $68,000 An additional $17,000 was spent in December 2016 to improve machinery covered by the patents and charged to the Patents account. The patents had a remaining legal term of 17 years. 2 On January 3, 2014, Sorenson purchased two licensing agreements; at that time they were believed to have unlimited useful lives. The balance in the Licensing Agreement No. 1 account included its purchase price of $48,000 and $2,000 in acquisition expenses. Licensing Agreement No. 2 also was purchased on January 3, 2016, for $50,000, but it has been reduced by a credit of $1,000 for the advance collection of revenue from the agreement 3. In December 2016, an explosion caused a permanent 60 percent reduction in the expected revenue- producing value of Licensing Agreement No. 1 and, in January 2017, a flood caused additional damage, which rendered the agreement worthless 4. A study of Licensing Agreement No. 2 made by Sorenson in January 2017 revealed that its estimated remaining life expectancy was only 10 years as of January 1, 2017 5. The balance in the Goodwill account includes $24,000 paid December 30, 2016, for an advertising program, which it is estimated will assist in increasing Sorenson's sales over a period of following the disbursement four years 6. The Leasehold Improvement account includes (a) the $15,000 cost of improvements with a total

Explanation / Answer

Journal Entries :-

S. No. Particulars Debit ($) Credit ($) 1a Machinery A/c Dr. 17000 To Patents A/c 17000 1b Cost of Goods Sold (68000/17) 4000 To Patents 4000 2 Licencing Agreement No.2 1000 To Revenue Received in Advance 1000 3 Retained Earnings (50000*60%) 30000 To Licencing Agreement No. 1 30000 4 Cost of Goods Sold (50000/10) 5000 To Licencing Agreement No.2 5000 5 Retained Earnings 24000 To Goodwill 24000 6a Equipment 8500 Accounts Receivable Non Trade 2500 To Leasehold Improvements 11000 6b Amortization Expense - Current year(15000/10) 1500 Amortization Expense - Error Correction (15000/10) 1500 To Leasehold Improvements 3000 7 Retained Earnings 29000 To Organizational Expenses 29000

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