Question 1:
During the current year, Black Corporation incurred the following expenditures which should be recorded either as operating expenses or as intangible assets:
A. Expenditures were made for the training of new employees. The average employee remains with the company for five years, but is trained for a new position every two years.
B. Black purchased a controlling interest in a vinyl flooring company. The expenditure resulted in the recording of a significant amount of goodwill. Black expects to earn above average returns on this investment indefinitely.
C. Black incurred large amounts of research and development costs in developing a dirt resistant carpet fiber. The company expects that the fiber will be patented and that sales of the resulting products will continue to revenue for at least 25 years. The legal life of the patent, however, will be only 20 years.
D. Black made an expenditure to acquire the patent on a popular carpet cleaner. The patent had a remaining legal life of 14 years, but Black to produce and sell the product for six more years.
E. Black spent a large amount to sponsor the televising of the Olympic Games. Black's intent was to make television viewers more aware of the company's name and its product lines.
Instructions:
Explain whether each of the above expenditures should be recorded as an operation expense or an intangible asset. If you view the expenditures as an intangible asset, indicate the number of years over which the asset should be amortized, if any. Explain your reasoning.
Question 2:
Swanson Corporation issued $ 8 million of 20 year, 8 percent bonds o n April 1, 2009, at 102. Interest is due on March 31 and September 30 of each year, and all of the bonds in the issue mature on March 31, 2029. Swanson's fiscal year ends on December 31.
Prepare the following journal entries:
a. April 1, 2009, to record the issuance of the bonds.
b. September 30, 2009, to pay interest and to amortize the bond premium.
c. March 31, 2029, to pay interest, amortize the bond premium, and retire the bonds at maturity(make tow separate entries).
d. Briefly explain the effect of amortizing the bond premium upon (1) annual net income and (2) annual net cash flow from operating activities. (Ignore possible income tax effects).
Note: Part C: The journal entry would include a debit to Bond Interest Payable for $160,000.