On January 1, 2011, Kramer Corp spent $250,000 developing a patent and
$90,000 in legal fees to secure the patent. Kramer estimated its productive
life to be 15 years, although its legal life was 20 years. On January 1, 2012,
Kramer spent $5,600 in legal fees in defense of the patent and won the
On December 31, 2014, one of Kramer’s competitors developed a patent that
significantly rivaled Kramer’s product. Kramer’s CFO determined that the
the fair value of the patent is $66,000 and future expected cash flows from
Kramer’s patent would be $63,000.
1 How much is the book value of the patent at Kramer’s year end on
December 31, 2012?
2 What was the book value of the patent as of December 31, 2015?
3 What journal entries, if any, did Kramer make on December 31, 2014?
Problem 2 â€“ Exchanges
On January 1, 2012, Wallace Company and Diggs Company agree to exchange
assets with the following characteristics:
Fair market value
Wallace Company has agreed to pay $6,000 cash to Diggs Company in the
1 Assume that the exchange of assets has commercial substance.
Make the necessary journal entries to record the exchange for
2 Assume that the exchange of assets does not have commercial
substance. Make the necessary journal entries to record the
exchange for both parties.
Problem 3 â€“ Capitalization of Interest
Early in 2011, Parker Corp. engaged Gable, Inc. to design and construct
a complete modernization of Parker’s manufacturing facility. Construction
began on June 1, 2011 and was completed on December 31, 2011.
Parker made the following payments to Gable, Inc. during 2011:
June 1, 2011
September 30, 2011
December 31, 2011
To help finance the construction, Parker issued the following during 2011:
* $1,500,000, 10Âyear, 10 percent note payable issued on
June 1, 2011, with interest payable annually on May 31.
Other debt held by the company during 2011 was as follows:
* A $4,000,000, 12Âpercent note payable dated January 1, 2008,
due January 1, 2016, with interest payable annually on January 1.
* A 30Âday, 9 percent loan dated July 1, 2011, in the amount
1 Compute the weightedÂaverage accumulated expenditure qualifying
for capitalization of interest cost.
2 Compute the avoidable interest.
3 The building has a salvage value of $800,000 and a useful life
of 50 years. What is the book value of the building as of 12/31/2012?