Moonbeam Company purchases the right to use a piece of music from the original m

Question

Moonbeam 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. Moonbeam could borrow this amount of money at an 8 percent annual interest at the current time. The arrangement states that Moonbeam will actually make an annual payment of $200,000 for four years on each January 1 starting on January 1, Year One. a. Record the journal entry for Moonbeam for the acquisition of this copyright on January 1, Year One. b. Record the adjusting entries for Moonbeam to recognize amortization expense on December 31, Year One. Assume the straight-line method is applied. c. Record the journal entries and the adjusting entries for Moonbeam for these payments and to recognize interest expense from December 31, Year One through January 1, Year Four.

Explanation / Answer

(a)January 1, Year 1:

Inatangible asset a/c                                                     Dr $ 800000                     -

To Bank a/c                                                                                 -                      $ 800000

( Being acquisition of Intangible asset)

(b)December 31, Year 1:

Amortization a/c                                                            Dr $ 200000                    -

To Intangible asset a/c                                                                -                    $ 200000

( Being amortization for Year 1)

Amortization per year on straight line basis   = Cost of the asset / Use ful life

                                                                                = $800000/4   = $200000

(c)Year 1:

Loan a/c                                                                          Dr $ 200000                   -

Interest on loan a/c Dr $ 64000                   -

To bank a/c                                                                                  -                 $ 264000

( being repayment of loan with interest)

Interest on loan = Loan outstanding *interest rate = $ 800000*8% = $64000

Year 2:

Loan a/c                                                                          Dr $ 200000                 -

Interest on loan a/c Dr $ 48000                -

To bank a/c                                                                               -                      $ 248000

( Being repayment of loan with interest)

Interest on loan = Loan outstanding *interest rate = $ 600000*8% = $48000

Year 3:

Loan a/c                                                                          Dr $ 200000                 -

Interest on loan a/c Dr $ 32000                -

To bank a/c                                                                               -                      $ 232000

( Being repayment of loan with interest)

Interest on loan = Loan outstanding *interest rate = $ 400000*8% = $32000

Year 4:

Loan a/c                                                                          Dr $ 200000                 -

Interest on loan a/c Dr $ 16000                -

To bank a/c                                                                               -                      $ 216000

( Being repayment of loan with interest)

Interest on loan = Loan outstanding *interest rate = $ 200000*8% = $16000

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