H&H Company acquired a patent of an oil extraction technique on Jan 1 2020 for $7.5
million. It was expected to have a 10-year life and no residual value. H&H uses
straight-line amortization for patents. On Jan 1 2021, H&H incurred $540k of legal
costs in successfully defending their patent from a competitor. This did not change
the original estimate regarding the useful life.
What is the carrying value of the patent at Dec 31, 2021?
Give this one a try later!
Purchase price : 7.5 million
Amortize over 10-years: 750k a year
Carrying value on 12/31/20: 7.5 million - 750k = 6.75 million
1/1/2020 capitalization for successful defense: 6.75 + .540 = 7.29
2021 amortization: 7.29/9 = 810k
, Dec 2021 carrying value: 7.29 - .810 =
$6.48 million
Challenges in Financial Reporting
Give this one a try later!
-Non-financial measurements
-Forward-looking information
-Soft assets
-Timeliness
-Understandability
Non-Operating Section of Income Statement
Give this one a try later!
includes things like interest expense, gains/losses on sales of PPE,
investments, etc.
Forward-looking information
Give this one a try later!
Investors want more forward-looking information but management is
hesitant to provide it
Which category on financial statements does Prepaid Insurance belong to?
,Give this one a try later!
Assets
Lobner's Company reported beginning assets of $100K and liabilities of $20K. During
the year, they reported net income of $21K, declared dividends of $80K, and issued
$66K of common stock. What is their ending Stockholder's Equity balance?
Give this one a try later!
$87K
Beginning Equity = $100K - $20K = $80K
Ending Equity =
$80K + $21K - $80K + $66K = $87K
NI and the issuance of common stock increase equity, while distribution of
dividends decreases equity.
King Corp issued $2 million, 10-year, 9% bonds in 2015 at 98. The bonds pay interest
each June 30 and Dec 31. and King Corp amortized the discount using the straight-
line method. If King Crop calls the bonds after 6-years at 102 when the carrying value
is $1.984 million, what amount of loss will they report on their income statement
related to these bonds?
Give this one a try later!
, $56,000
Loss on early redemption is equal to the call price less the carrying value
of the bond on the date of retirement.
Call Price: $2m * 1.02 = $2.04 million
Loss: $2.04 - 1.984 = $56,000
Journal Entry on call date:
Dr. B/P: $2m
Dr. Loss on early redemption: $56k
Cr. Discount on B/P: (2-1.984) $16k
Cr. Cash: $2.04m
Timeliness
Give this one a try later!
there is a trade-off between providing quick information and accuracy,
since users want the information quickly while it is still relevant
Stella had $315K in liabilities before adjusting journal entries. What amount of
liabilities will be reported after the following adjusting entries:
1. Recording dep. exp of $23K
2. Earned $70K of service revenue not yet paid
3. Used $45K of prepaid maintenance contract
4. Accrued $80K of interest expense on outstanding notes payable
5. Earned $134K of service revenue that was already paid for last period
Give this one a try later!
million. It was expected to have a 10-year life and no residual value. H&H uses
straight-line amortization for patents. On Jan 1 2021, H&H incurred $540k of legal
costs in successfully defending their patent from a competitor. This did not change
the original estimate regarding the useful life.
What is the carrying value of the patent at Dec 31, 2021?
Give this one a try later!
Purchase price : 7.5 million
Amortize over 10-years: 750k a year
Carrying value on 12/31/20: 7.5 million - 750k = 6.75 million
1/1/2020 capitalization for successful defense: 6.75 + .540 = 7.29
2021 amortization: 7.29/9 = 810k
, Dec 2021 carrying value: 7.29 - .810 =
$6.48 million
Challenges in Financial Reporting
Give this one a try later!
-Non-financial measurements
-Forward-looking information
-Soft assets
-Timeliness
-Understandability
Non-Operating Section of Income Statement
Give this one a try later!
includes things like interest expense, gains/losses on sales of PPE,
investments, etc.
Forward-looking information
Give this one a try later!
Investors want more forward-looking information but management is
hesitant to provide it
Which category on financial statements does Prepaid Insurance belong to?
,Give this one a try later!
Assets
Lobner's Company reported beginning assets of $100K and liabilities of $20K. During
the year, they reported net income of $21K, declared dividends of $80K, and issued
$66K of common stock. What is their ending Stockholder's Equity balance?
Give this one a try later!
$87K
Beginning Equity = $100K - $20K = $80K
Ending Equity =
$80K + $21K - $80K + $66K = $87K
NI and the issuance of common stock increase equity, while distribution of
dividends decreases equity.
King Corp issued $2 million, 10-year, 9% bonds in 2015 at 98. The bonds pay interest
each June 30 and Dec 31. and King Corp amortized the discount using the straight-
line method. If King Crop calls the bonds after 6-years at 102 when the carrying value
is $1.984 million, what amount of loss will they report on their income statement
related to these bonds?
Give this one a try later!
, $56,000
Loss on early redemption is equal to the call price less the carrying value
of the bond on the date of retirement.
Call Price: $2m * 1.02 = $2.04 million
Loss: $2.04 - 1.984 = $56,000
Journal Entry on call date:
Dr. B/P: $2m
Dr. Loss on early redemption: $56k
Cr. Discount on B/P: (2-1.984) $16k
Cr. Cash: $2.04m
Timeliness
Give this one a try later!
there is a trade-off between providing quick information and accuracy,
since users want the information quickly while it is still relevant
Stella had $315K in liabilities before adjusting journal entries. What amount of
liabilities will be reported after the following adjusting entries:
1. Recording dep. exp of $23K
2. Earned $70K of service revenue not yet paid
3. Used $45K of prepaid maintenance contract
4. Accrued $80K of interest expense on outstanding notes payable
5. Earned $134K of service revenue that was already paid for last period
Give this one a try later!
