On January 1, Year One, Fred Corporation purchases a patent from Barney Company for $10 million, payable at the end of three years. The patent itself has an expected life of ten years and no anticipated residual value. No interest rate is stated in the contract, but Fred could borrow that amount of money from a bank at 6 percent interest. Amortization is recorded using the straight-line method.
1) Record the journal entry for the patent acquisition on January 1, Year One.
2) Record the year-end adjusting entries to recognize both interest expense and amortization expense for each of these three years.
3) Record the journal entry for Fred's payment on December 31, Year Three.