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Chapter (11) (continue) "Impairment Loss"

Exercise 1:
Holcomb Corporation owns machinery with a book value of $190,000. The machinery’s fair value less
costs to sell is $175,000, and its value-in-use is $200,000.
a. There is impairment Loss by $10,000
b. There is impairment loss by $25,000
C. There is impairment Loss by $15,000
D. There is no impairment Loss
solution
Carrying amount compare Recoverable amount
"190,000" "200,000"

higher

Fair value – cost to sell Value in use

"175,000" "200,000"

So carrying amount 190,000 < recoverable amount 200,000

there is No impairment Loss impairment ‫ﻛﺪه ﯾﺒﻘﻲ ﻣﻔﯿﺶ‬
Exercise 2 :
Technique Co. has equipment with a carrying amount of $900,000 .The equipment’s fair value less costs to
sell is $780,000 ,and its value –in use is $815,000. The equipment is expected to be used in operations in the
future .
1.the total amount of impairment loss will be
a.$85,000 b.$35,000 c.$13,000 D.$58,000
2.the amount that should be recorded for a machine at balance sheet should be
a.$900,000 b.$815,000 c.$780,000 D.$82,000
solution
Carrying amount Recoverable amount
compare
"900,000" "815,000"

higher

Fair value – cost to sell Value in use

"780,000" "815,000"

So carrying amount 900,000 > recoverable amount 815,000

there is impairment Loss 85,0000 ‫ ﺗﺪھﻮر ﺑﻘﯿﻤﺔ‬impairment ‫ﻛﺪه ﯾﺒﻘﻲ ﻓﻲ‬
Cruz makes the following entry to record the impairment loss:
Loss on impairment 85,000

Accumulated depreciation-equipment 85,000

New BV = BV900,000 – impairment Loss 85,000 = $815,000

FB :Moustafa marzouk (accounting) for faculty of commerce English section-01228988832

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Exercise 3: impairment Loss (v.imp)
On January 1, 2015, Fredrichs Inc. purchased equipment with a cost of $3,060,000, a useful life of 12 years
and no salvage value. The company uses straight-line depreciation. At December 31, 2015, the company
determines that impairment indicators are present. The fair value less cost to sell the asset is estimated to be
$2,600,000. The asset’s value-in-use is estimated to be $2,365,000. There is no change in the asset’s useful
life or salvage value.
1. the 2015 income statement will report Loss on Impairment of
A.$0 b. $205,000. c.$440,000 d. $460,000.
2. The 2016 (second year) income statement report depreciation expense for the equipment.
A.$216,667 b. $236,364. c.$255,000 d. $260,000.
solution
1st year 2015:
𝑪𝒐𝒔𝒕 𝒔𝒂𝒍𝒗𝒂𝒈𝒆 𝒗𝒂𝒍𝒖𝒆
dep.exp = 𝒖𝒔𝒆𝒇𝒖𝒍 𝒍𝒊𝒇𝒆
, ,
Old DEP exp/year = =$255,000/y

Depreciation expense 255,000

Accumulated Depreciation 255,000

Accumulated dep until dec.31.2015 = 255,000 x 1years = $255,000

Book value = cost 3,060,000 – accumulated depreciation $255,000 = $2,805,000
Then Make impairment test :

Carrying amount(BV) Recoverable amount

compare
"2,805,000" "2,600,000"

higher

Fair value – cost to sell Value in use

"2,600,000" "2,365,000"

there is impairment Loss 205,0000 ‫ ﺗﺪھﻮر ﺑﻘﯿﻤﺔ‬impairment ‫ﻛﺪه ﯾﺒﻘﻲ ﻓﻲ‬

Impairment Loss = recoverable $2,600,000 – carrying amount (BV)$2,805,000 = -$205,000 Loss

Impairment Loss 205,000

Accumulated Depreciation 205,000

2nd year 2016:

1) New accumulated depreciation = 255,000+205,000 =$460,000
2) New B.V on jan 1,2016 = cost $3,060,000 – New accumul. dep. $460,0000 = $2,600,000
3) New salvage value = $0
4) Remaining Life = useful life "12" – used "1" = "11 "remaining"
So Depreciation expense for 2016 Dec.31 :
. 𝒏𝒆𝒘 𝒔𝒂𝒍𝒗𝒂𝒈𝒆
New dep.exp = 𝒓𝒆𝒎𝒂𝒊𝒏𝒊𝒏𝒈 𝒍𝒊𝒇𝒆
, ,
New dep exp for 2106 = = 236,364
Depreciation expense 236,364
Accumulated depreciation-equipment 236,364

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Exercise 4 :vvvvvvvvvvvvv.imp
Presented below is information related to equipment owned by Alex company at December 31,2015
Cost 9,000,000
Accumulated . Depreciation . To date 1,000,000
Value in use 7,000,000
Fair value less cost to sell 4,800,000
Assume that Alex "intends to use of the equipment in the future" . As of December 31, 2015, the
equipment has a remaining useful life of 4 years.
1. the 2015 income statement will report Loss on Impairment of
A.$0 b. $1,000,000. c.$1,250,000 d. $1,460,000.

2. The 2016 (second year) income statement report depreciation expense for the equipment.
A.$1,535,000 b. $1,750,000. c.$1,255,000 d. $2,260,000.
Solution
1st: Journal entry 2015:
Impairment test will be as follow:
Carrying amount Recoverable amount
8,000,000=(9,000,000 – 1,000,000) > 7,000,000

higher

Fair value – cost to sell Value in use

4,800,000 7,000,000

Impairment Loss
=recoverable amount 7,000,000 – BV 8,000,000 = -1,000,000 Loss
the following entry to record the impairment loss:
Loss on impairment + 1,000,000
Accumulated depreciation-equipment+ 1,000,000
‫ ﺑﻛده ﻻزم ﻧﺣﺳب اھﻼك ﺟدﯾد ﺑﺎﻻرﻗﺎم اﻟﺟدﯾده‬asset ‫ﺧﻠﻲ ﺑﺎﻟك طﺎﻟﻣﺎ ھﻧﻛﻣل ﻓﻲ اﺳﺗﺧدام ال‬

2nd: Journal entry 2016:

The company will "use this assets" so we must calculate "Depreciation expense"
1) New accumulated depreciation = 1,000,000+1,000,000 =$2,000,000
2) New B.V on jan 1,2016 = cost$9,000,000 – New accum .dep $2,000,000 = $7,000,000
3) New salvage value = $0
4) Remaining Life = 4 years (given)
So Depreciation expense for 2016 Dec.31 :
. 𝒏𝒆𝒘 𝒔𝒂𝒍𝒗𝒂𝒈𝒆
New dep.exp = 𝒓𝒆𝒎𝒂𝒊𝒏𝒊𝒏𝒈 𝒍𝒊𝒇𝒆
, ,
New dep exp for 2106 = = $1,750,000
Depreciation expense 1,750,000
Accumulated depreciation-equipment 1,750,000

FB :Moustafa marzouk (accounting) for faculty of commerce English section-01228988832

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Exercise 5:
On January 2, 2015, Q. Tong Inc. purchased equipment with a cost of $10,440,000, a useful life of 10 years
and no salvage value. The company uses straight-line depreciation. At December 31, 2015 and December 31,
2016, the company determines that impairment indicators are present. The following information is
available for impairment testing at each year end:
12/31/2015 12/31/2016
Fair value less costs to sell $9,315,000 $8,850,000
Value-in-use $9,350,000 $8,915,000
.There is no change in the asset’s useful life or salvage value. The 2016 income statement will report
Required
1. The 2016 (second year) income statement report depreciation expense for the equipment.
A.$1,535,000 b. $1,038,889. c.$1,255,000 d. $2,260,000.

2.There is no change in the asset’s useful life or salvage value. The 2016 income statement will report
a. no Impairment Loss or Recovery of Impairment Loss.
b. Impairment Loss of HK$435,000.
c. Recovery of Impairment Loss of HK$40,889.
d. Recovery of Impairment Loss of HK$603,889
solution
1st year 2015:
(1) Recording dep. exp. without impairment 2015:
𝒄𝒐𝒔𝒕 𝟏𝟎,𝟒𝟒𝟎,𝟎𝟎𝟎 𝒔𝒂𝒍𝒗𝒂𝒈𝒆𝟎
1)dep exp = 𝒖𝒔𝒆𝒇𝒖𝒍 𝒍𝒊𝒇𝒆𝟏𝟎
=1,044,000/y
Depreciation expense 1,044,000
Accumulated dep 1,044,000
Accumulated dep until dec.31.2015 = 1,044,000 x 1years = $1,044,000
Book value with out impairment = cost 10,440,000 – accumulated 1,044,000 = 9,396,000
Impairment ‫ ﻗﺑل ال‬B.V ‫ﺧﻠﻲ ﺑﺎﻟك دي ال‬
(2) Impairment test (2015): (Not given)

Carrying Recoverable amount

amount9,396,000 compare
9,350,000
higher

Fair value – cost to sell Value in use

"9,315,000" "9,350,000"

Impairment Loss = recoverable amount 9,350,000 - B.V 9,396,000 = - 46,000

Loss on impairment 46,000
Accumulated Depreciation 46,000
New accumulated depreciation = 1,044,000+46,000 =$1,090,000
New B.V on jan 1,2016 = cost $10,440,000 – New accumul. dep. $1,090,000 = $9,350,000
2nd: Journal entry 2016:
𝑵𝒆𝒘 𝑩.𝑽𝟗,𝟑𝟓𝟎,𝟎𝟎𝟎 𝒏𝒆𝒘 𝒔𝒂𝒍𝒗𝒂𝒈𝒆 (𝟎)
New dep.exp = =1,038,889
𝒓𝒆𝒎𝒂𝒊𝒏𝒊𝒏𝒈 𝒍𝒊𝒇𝒆 𝟗
Depreciation expense 1,038,889
Accumulated depreciation 1,038,889
New Book value ( new carrying amount) = BV – accumulated .Dep
=9,350,000– 1,038,889= 8,311,111

FB :Moustafa marzouk (accounting) for faculty of commerce English section-01228988832

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3rd : Impairment Loss 2016(Reversal)
BV without impairment ‫ و ﻣره ﺑﺎل‬BV with impairment ‫ ﻣرﺗﯾن ﻣره ﺑﺎل‬depreciation ‫ھﺣﺳب ھﻧﺎ ال‬
𝑵𝒆𝒘 𝑩.𝑽 $𝟗,𝟑𝟗𝟔,𝟎𝟎𝟎 𝒔𝒂𝒍𝒗𝒂𝒈𝒆 𝒗𝒂𝒍𝒖𝒆 𝟎
1st:dep.exp(without impairment ) = = $1,044,000
𝒓𝒆𝒎𝒂𝒊𝒏𝒊𝒏𝒈 𝒍𝒊𝒇𝒆(𝟗)

𝑵𝒆𝒘 𝑩.𝑽𝟗,𝟑𝟓𝟎,𝟎𝟎𝟎 𝒏𝒆𝒘 𝒔𝒂𝒍𝒗𝒂𝒈𝒆 (𝟎)

New dep.exp = =1,038,889
𝒓𝒆𝒎𝒂𝒊𝒏𝒊𝒏𝒈 𝒍𝒊𝒇𝒆 𝟗

2016 BV(with out impairment ) 2016 BV (with impairment)

= 9,396,000 – 1,044,000 = 8352,000 = 9,350,000 - 1,038,889 = 8,311,111
Maximum amount to recover = $40,889 ‫ﻛده ال‬
‫ اﻛﺗر ﻣن ﻛده ﻣش ھﻘدر اﻏطﻲ‬40,889 ‫ ھﻲ ال‬recovery ‫ و ده ھو اﻗﺻﻲ ﺧﺳﺎره اﻗدر اﻋﻣﻠﮭﺎ‬40,889 ‫ﺑﻛده اﻟﻔرق‬
(3) recover impairment loss at the end of 2016
Carrying amount(BV) Recoverable amount
compare
8,311,111 8,915,000
Recovered loss = 8,915,000 – 8,311,111 = 603,889
‫ ﺑﺗﺎﻋﻲ‬Limit ‫ ﻣن ﺧﺳﺎﺋرﻧﺎ ﻻن ده ال‬40,889 ‫ل‬recovery ‫ﻛده ھﻧﻌﻣل‬
‫ و دي ھﻲ اﻗﺻﻲ ﺧﺳﺎره اﻗدر اﻏطﯾﮭﺎ و ﺑس‬40,889 ‫ ﻟﻛن اﻧﺎ ﻣش ﻋﺎوز ﻛل ده اﻧﺎ ھﻐطﻲ ﻓﻘط‬603,889 ‫ ﺑﺎﻟﻔرق اﻟﻠﻲ ھو‬recovery ‫ﻛده ھﻧﻘدر ﻧﻌﻣل‬
Accumulated depreciation 40,889
Recovered impairment loss 40,889

Exercise 6 :
On January 1, 2015, Edmondton Inc. purchased equipment with a cost of €4,500,000, a useful life of 12 years
and no salvage value. The Company uses straight-line depreciation. At December 31, 2015, the company
determines that impairment indicators are present. The fair value less cost to sell the asset is estimated to be
€3,850,000. The asset’s value-in-use is estimated to be €3,500,000. There is no change in the asset’s useful
life or salvage value.
1. the 2015 income statement will report Loss on Impairment of
A.$0 b. $275,000. c.$625,000 d. $650,000.
2. The 2016 (second year) income statement report depreciation expense for the equipment.
A.$320,833 b. $350,000. c.$375,000 d. $385,000.
solution
2015:Annual depreciation = 4,500,000 /12 = 375,000
Depreciation expense 375,000
Accumulated dep 375,000
New Book value ( new carrying amount) = Cost– accumulated .Dep
=4,500,000– 375,000= 4,125,000
Record impairment Loss:Imp.Loss = Recoverable amount 3,850,000 - B.V 4,125,000 = - 275,000
Loss on impairment 275,000
Accumulated depreciation-equipment 275,000

New Book value ( new carrying amount) = B.V - acc.Dep

=4,125,000– 275,000= 3,850,000
Record Depreciation 2016:
𝑵𝒆𝒘 𝑩.𝑽𝟑,𝟖𝟓𝟎,𝟎𝟎𝟎 𝒏𝒆𝒘 𝒔𝒂𝒍𝒗𝒂𝒈𝒆 (𝟎)
New dep.exp = =350,000
𝒓𝒆𝒎𝒂𝒊𝒏𝒊𝒏𝒈 𝒍𝒊𝒇𝒆 𝟏𝟏

Depreciation expense 350,000

Accumulated depreciation 350,000

FB :Moustafa marzouk (accounting) for faculty of commerce English section-01228988832

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Exercise 7:
Presented below is information related to equipment owned by Marley Company at December 31, 2015.
Cost $7,000,000
Accumulated depreciation to date 1,500,000
Value-in-use 5,000,000
Fair value less cost of disposal 4,400,000
1-Assume that Marley will continue to use this asset in the future. As of December 31, 2015, the equipment
has a remaining useful of 4 years.
2-The recoverable amount of the equipment at December 31, 2016, is $5,250,000.
1. the 2015 income statement will report Loss on Impairment of
A.$0 b. $500,000. c.$540,000 d. $560,000.
2. the end of 2015 balance sheet will report asset by BV=
A.$0 b. $700,000. c.$5,000,000 d. $4,400,000.
3. The 2016 (second year) income statement report depreciation expense for the equipment.
A.$1,535,000 b. $1,250,000. c.$1,255,000 d. $2,260,000.
Solution
1st: Journal entry 2015:
Carrying amount Recoverable amount
5,500,000 (7,000,000 – 1,500,000) compare 5,000,000

higher

Fair value – cost to sell Value in use

4,400,000 5,000,000
Impairment Loss = B.V 5,500,000 – recoverable amount 5,000,000 = 500,000
Cruz makes the following entry to record the impairment loss:
Loss on impairment 500,000
Accumulated depreciation-equipment 500,000
New accumulated depreciation = 1,500,000+500,000 = 2,000,000
New Book value ( new carrying amount) = cost – New accumulated depreciation
=7,000,000 – 2,000,000= 5,000,000
2 : Journal entry 2016:
nd

The company will use this assets so we must calculate "Depreciation expense"
𝑵𝒆𝒘 𝑩.𝑽𝟓,𝟎𝟎𝟎,𝟎𝟎𝟎 𝒏𝒆𝒘 𝒔𝒂𝒍𝒗𝒂𝒈𝒆 (𝟎)
New dep.exp = =1,250,000
𝒓𝒆𝒎𝒂𝒊𝒏𝒊𝒏𝒈 𝒍𝒊𝒇𝒆 𝟒
Depreciation expense 1,250,000
Accumulated depreciation-equipment 1,250,000
New accumulated depreciation = 1,500,000+500,000+1,250,000=3,250,000
New Book value ( new carrying amount) = cost – New accumulated
=7,000,000 – 3,250,000 = 3,750,000
CA without impairment = $5,500,000 - 1,375,000 = 4,125,000
CA with impairment = $5,000,000 – 1,250,000 = (3,750,000)
=Maximum amount to recover = 375,000
(c) Impairment test (In 2016)
1-Recoverable amount = $5,250,000 (Given
2-Recoverable amount (5,250,000) > CA with impairment (3,750,000)
Recovery of Loss = $ 5,250,000 – 3,750,000 = 1,500,000
:1,500,000 is higher than $375,000. So recover 375,000
Accumulated depreciation-equipment 375,000
Recovered impairment loss 375,000

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Exercise 8 :
Tan Company purchases equipment on January 1, 2015, for $300,000 and useful life of three years, and no
residual value. At December 31, 2015, Tan records an impairment loss of $20,000 At the end of 2016, Tan
determines that the recoverable amount of the equipment is $96,000. Tan reverse the impairment
Required: Prepare necessary journal entries to record depreciation expenses and impairment (recovery) at
the end of 2015, and 2016.
solution
1st year 2015:
(1) Recording dep. exp. without impairment 2015:
𝑪𝒐𝒔𝒕 $𝟑𝟎𝟎,𝟎𝟎𝟎 𝒔𝒂𝒍𝒗𝒂𝒈𝒆 𝒗𝒂𝒍𝒖𝒆 𝟎
1)dep.exp = =$100,000/y
𝒖𝒔𝒆𝒇𝒖𝒍 𝒍𝒊𝒇𝒆(𝟑)
Depreciation expense 100,000
Accumulated Depreciation 100,000
Accumulated dep until dec.31.2015 = 100,000 x 1years = $100,000
Book value with out impairment = cost 300,000 – accumulated depreciation $100,000 = $200,000
Impairment ‫ ﻗﺑل ال‬B.V ‫ﺧﻠﻲ ﺑﺎﻟك دي ال‬
(2) Impairment test (2015): Impairment loss $20,000 (given)
Loss on impairment 20,000
Accumulated Depreciation 20,000
New accumulated depreciation = 100,000+20,000 =$120,000
New B.V on jan 1,2016 = cost $300,000 – New accumul. dep. $120,000 = $180,000
Impairment ‫ ﺑﻌد ال‬B.V ‫ﺧﻠﻲ ﺑﺎﻟك دي ال‬
2nd year 2016:
BV without impairment ‫ و ﻣره ﺑﺎل‬BV with impairment ‫ ﻣرﺗﯾن ﻣره ﺑﺎل‬depreciation ‫ھﺣﺳب ھﻧﺎ ال‬
𝑵𝒆𝒘 𝑩.𝑽 $𝟐𝟎𝟎,𝟎𝟎𝟎 𝒔𝒂𝒍𝒗𝒂𝒈𝒆 𝒗𝒂𝒍𝒖𝒆 𝟎
1st:dep.exp(without impairment ) = = $100,000
𝒓𝒆𝒎𝒂𝒊𝒏𝒊𝒏𝒈 𝒍𝒊𝒇𝒆(𝟐)
𝑵𝒆𝒘 𝑩.𝑽 $𝟏𝟖𝟎,𝟎𝟎𝟎 𝒔𝒂𝒍𝒗𝒂𝒈𝒆 𝒗𝒂𝒍𝒖𝒆 𝟎
2nd:dep.exp(with impairment ) = = $90,000
𝒓𝒆𝒎𝒂𝒊𝒏𝒊𝒏𝒈 𝒍𝒊𝒇𝒆(𝟐)

2016 BV(with out impairment ) 2016 BV (with impairment)

= 200,000 – 100,000 = 100,000 = 180,000 - 90,000 = 90,000
Maximum amount to recover = $10,000 ‫ﻛده ال‬
(3) recover impairment loss at the end of 2016

Carrying amount(BV)90,000 compare Recoverable amount 96,000

‫ ﻓﻌﺎدي ﻣﻣﻛن ﻧﻘدر ﻧﻐطﻲ اﻟﺧﺳﺎﺋر دي‬10,000 ‫ اﻟﻠﻲ ھو اﺻﻼ‬limit ‫ ﻣن ﺧﺳﺎﺋرﻧﺎ وده اﻗل ﻣن ال‬6,000 ‫ل‬recovery ‫ﻛده ھﻧﻌﻣل‬
Accumulated depreciation 6,000
Recovered impairment loss 6,000
Exercise 9 :
Presented below is information related to equipment owned by Alex company at ,31,12,2015
Cost 9,000,000 Value in us 7,000,000
Accumulated . Depreciation . To date 1,000,000 Fair value less cost to sell 4,800,000
Assume that Alex "intends to Dispose the equipment in the future" . As of December 31, 2015, the
equipment has a remaining useful life of 4 years.
a-prepare the journal entry (if any) to record the impairment Loss of the asset at Dec. 31 2015
b-prepare the journal entry (if any) to record depreciation expense for 2016.
Solution
1 : Journal entry 2015:
st

" imp.loss = "NRV– BV" (dispose ‫)ﺧﻠﻲ ﺑﺎﻟﻚ ھﻨﺎ ﻓﻲ ﺣﺎﻟﺔ ال‬
Special case = NRV 4,800,000 –BV 8,000,000 = - 3,200,000
makes the following entry to record the impairment loss:
Loss on impairment 3,200,000
Accumulated depreciation-equipment 3,200,000
depreciationNo entry ‫ ﻟل‬entry ‫اﻟﺷرﻛﮫ ﻗررت اﻧﮭﺎ ھﺗﺗﺧﻠص ﻣﻧﮫ ﺑﻛده ﻣش ھﮭﻠﻛﮫ ﺗﺎﻧﻲ ﻣش ھﻧﻌﻣل‬
FB :Moustafa marzouk (accounting) for faculty of commerce English section-01228988832
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(2) "Depletion of natural resources"

Exercise1:
on April 1, 2016 ABC co. purchased a Coal mine for $ 1,000,000 (land value $100,000. the co. paid
development costs $ 600,000 & expected to pay $500,000 for restoration the total expected production from
the mine was 500,000 tons of coal.
During 2016: actual units extracted 100,000 tons.& units sold 70,000 tons
1)The amount of depletion expense of extracted material should be?
a.$640,000 b.$800,000 c.$280,000 d.$150,000
280,000 ‫ ﻋﺷﺎن ﻛده اﺧﺗرت ال‬COGS ‫ ﯾﻘﺻد ﺑﯾﮭﺎ ال‬Depletion expensed ‫ﺧﻠﻲ ﺑﺎﻟك ھﻧﺎ ال‬ 
2)what's the carrying amount that should be recorded at financial position statement?
a.$1,700,000. b.$4,150,000. c.$3,050,000. d.$3,150,000.
‫ﺧﻠﻲ ﺑﺎﻟك ھﻧﺎ ھو ﻋﺎوز ھﻲ ﻗﯾﻣﺔ اﻻﺻل ده ھﺗظﮭر ﺑﻛﺎم ﻓﻲ اﻟﻘواﺋم اﻟﻣﺎﻟﯾﮫ‬ 
solution
1ststep The cost of coal mine :
Acquisition price 1,000,000
+development costs 600,000
+restoration costs 500,000
Total cost 2,100,000
Depletion of natural resources : (units of activity method):

2nd step : Depletion .rate /unit =

𝒄𝒐𝒔𝒕𝟐,𝟏𝟎𝟎,𝟎𝟎𝟎 𝒔𝒂𝒍𝒗𝒂𝒈𝒆 (𝒓𝒆𝒔𝒊𝒅𝒖𝒂𝒍) 𝒗𝒂𝒍𝒖𝒆 𝟏𝟎𝟎,𝟎𝟎𝟎
= $4/u
𝒕𝒐𝒕𝒂𝒍 𝒆𝒔𝒕𝒊𝒎𝒂𝒕𝒆𝒅 𝒖𝒏𝒊𝒕𝒔 𝟓𝟎𝟎,𝟎𝟎𝟎𝒖

3rd step : Extracted 4th step: Sold

Depletion cost /year = If units extracted are sold we must calculate
units extracted x depletion rate=xx COGS = Units sold x depletion rate = Xx
=100,000 u x $4 = $400,000 COGS = 70,000 u x $4 = $280,000
Depletion entry: COGS entry:
inventory 400,000 COGS 280,000
Accumu. Depletion 400,000 Inventory 280,000

5th step: effect on the statement of financial positionBalance sheet:

Coal mine (at cost) $2,100,000
(-)Accumulated depletion ($400,000)
=Carrying amount(BV) $1,700,000
Exercise 2:
MaClede Co. acquired the right to use 1,000 acres of land in South Africa to mine for silver. The lease cost is
€50,000, and the related exploration costs on the property are €100,000. Intangible development costs
incurred in opening the mine are €850,000. MaClede estimates that the mine will provide approximately
100,000 ounces of silver. If MaClede extracts 25,000 ounces in the first year.
Assume that the company sold 20,000 ounces during the year. The amount not sold remains in inventory .
1)The amount of depletion expense of extracted material should be?
a.$640,000 b.$800,000 c.$200,000 d.$150,000
200,000 ‫ ﻋﺷﺎن ﻛده اﺧﺗرت ال‬COGS ‫ ﯾﻘﺻد ﺑﯾﮭﺎ ال‬Depletion expensed ‫ ﺧﻠﻲ ﺑﺎﻟك ھﻧﺎ ال‬
2)what's the carrying amount that should be recorded at financial position statement?
a.$750,000. b.$4,150,000. c.$3,050,000. d.$3,150,000.
‫ ﺧﻠﻲ ﺑﺎﻟك ھﻧﺎ ھو ﻋﺎوز ھﻲ ﻗﯾﻣﺔ اﻻﺻل ده ھﺗظﮭر ﺑﻛﺎم ﻓﻲ اﻟﻘواﺋم اﻟﻣﺎﻟﯾﮫ‬
3)The amount of depletion cost ?
a.$640,000 b.$800,000 c.$250,000 d.$150,000
4)what is the cost of ending inventory ?
a.$40,000 b.$70,000 c.$50,000 d.$56,000

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solution
1ststep cost of natural resources:
Acquisition price (Lease cost) 50,000
+exploration costs 100,000
+development costs 850,000
Total cost 1,000,000

2nd step : Depletion .rate /unit =

𝒄𝒐𝒔𝒕𝟏,𝟎𝟎𝟎,𝟎𝟎𝟎 𝒔𝒂𝒍𝒗𝒂𝒈𝒆 (𝒓𝒆𝒔𝒊𝒅𝒖𝒂𝒍) 𝒗𝒂𝒍𝒖𝒆 𝟎
= $10/u
𝒕𝒐𝒕𝒂𝒍 𝒆𝒔𝒕𝒊𝒎𝒂𝒕𝒆𝒅 𝒖𝒏𝒊𝒕𝒔 𝟏𝟎𝟎,𝟎𝟎𝟎𝒖
3rd step : Extracted 4th step: Sold
Depletion cost /year = If units extracted are sold we must calculate
units extracted x depletion rate=xx
=25,000 u x $10 = $250,000 COGS = Units sold x depletion rate = Xx
COGS = 20,000 u x $10 = $200,000
Depletion entry: COGS entry:
inventory 250,000 COGS 200,000
Accumu. Depletion 250,000 Inventory 200,000
Ending inventory cost = Remaining units(extracted – sold) x depletion rate
= 25,000 u(extracted) – 20,000u(sold) = 5,000 x $10/u = $50,000
th
5 step: effect on the statement of financial positionBalance sheet:
Silver mine (at cost) $1,000,000
(-)Accumulated depletion ($250,000)
=BV $750,000
Exercise 3:
In January, 2015, Yoder Corporation purchased a mineral mine for $3,400,000 with removable ore estimated
by geological surveys at 2,000,000 tons. The property has an estimated value of $200,000 after the ore has
been extracted. The company incurred $1,000,000 of development costs preparing the mine for production.
During 2015, 500,000 tons were removed and 400,000 tons were sold.
1)The amount of depletion expense of extracted material should be?
a.$640,000 b.$800,000 c.$840,000 d.$1,050,000
840,000 ‫ ﻋﺷﺎن ﻛده اﺧﺗرت ال‬COGS ‫ ﯾﻘﺻد ﺑﯾﮭﺎ ال‬Depletion expensed ‫ ﺧﻠﻲ ﺑﺎﻟك ھﻧﺎ ال‬
2)what's the carrying amount that should be recorded at financial position statement?
a.$3,350,000. b.$4,150,000. c.$3,050,000. d.$3,150,000.
Solution
1ststep cost of natural resources:
Acquisition price 3,400,000
+development costs 1,000,000
Total cost 4,400,000

2nd step : Depletion .rate /unit =

𝒄𝒐𝒔𝒕 𝟒,𝟒𝟎𝟎,𝟎𝟎𝟎 𝒔𝒂𝒍𝒗𝒂𝒈𝒆 (𝒓𝒆𝒔𝒊𝒅𝒖𝒂𝒍) 𝒗𝒂𝒍𝒖𝒆 𝟐𝟎𝟎,𝟎𝟎𝟎
= $2.1/u
𝒕𝒐𝒕𝒂𝒍 𝒆𝒔𝒕𝒊𝒎𝒂𝒕𝒆𝒅 𝒖𝒏𝒊𝒕𝒔 𝟐,𝟎𝟎𝟎,𝟎𝟎𝟎𝒖
3rd step : Extracted 4th step: Sold
Depletion cost /year = If units extracted are sold we must
units extracted x depletion rate=xx COGS = Units sold x depletion rate = Xx
=500,000 u x $2.1 = $1,050,000 COGS = 400,000 u x $2.1 = $840,000
Depletion entry: COGS entry:
inventory 1,050,000 COGS 840,000
Accumu. Depletion 1,050,000 Inventory 840,000

5th step: effect on the statement of financial positionBalance sheet:

Mineral mine (at cost) $4,400,000
(-)Accumulated depletion ($1,050,000)
=BV $3,350,000

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Exercise 4:
Percy Resources Company acquired a tract of land containing an extractable mineral resource . Percy is
required by its purchase contract to restore the land to a condition suitable for recreational use after it has
extracted the mineral resource .Geological surveys estimate that the recoverable reserves will be 2,000,000
tons , and that the land will have a value of $1,200,000 after restoration .Relevant cost in formation follows:
 Land $9,000,000
 Estimated restoration costs $1,800,000
If Percy maintains no inventories of extracted material .what should be the charge to depletion
expense per ton?
 Cost = 9,000,000 +1,800,000 =$10,800,000
a.$3.90
 Salvage value (land value) = $1,200,000
b.$4.50
 Total Production = 2,000,000 tons
c.$4.80
d.$5.40 𝒄𝒐𝒔𝒕𝟏𝟎,𝟖𝟎𝟎,𝟎𝟎𝟎 𝒔𝒂𝒍𝒗𝒂𝒈 𝟏,𝟐𝟎𝟎,𝟎𝟎𝟎
Depletion .rate /unit = 𝒕𝒐𝒕𝒂𝒍 𝒖𝒏𝒊𝒕𝒔 𝟐,𝟎𝟎𝟎,𝟎𝟎𝟎𝒖
= $4.8/ton

Exercise 5:
In March, 2015, Maley Mines Co. purchased a coal mine for $6,000,000. Removable coal is estimated at
1,500,000 tons. Maley is required to restore the land at an estimated cost of $720,000, and the land should
have a value of $630,000. The company incurred $1,500,000 of development costs preparing the mine for
production. During 2015, 450,000 tons were removed and 300,000 tons were sold.
The total amount of Depletion cost 2015 will be:
a.1,374,000
Acquisition price (Lease cost) 6,000,000
b.1,518,000
+restoration costs 720,000
C.2,061,000
+development costs 1,500,000
d. 2,277,000
Total cost 8,220,000
𝒄𝒐𝒔𝒕 𝟖,𝟐𝟐𝟎,𝟎𝟎𝟎 𝒔𝒂𝒍𝒗𝒂𝒈 𝟔𝟑𝟎,𝟎𝟎𝟎
1st: Depletion .rate /unit = = $5.06/ton
𝒕𝒐𝒕𝒂𝒍 𝒖𝒏𝒊𝒕𝒔 𝟏,𝟓𝟎𝟎,𝟎𝟎𝟎𝒖

2nd: Depletion cost /year

units extracted x depletion rate=xx
=450,000 u x $5.06 = $2,277,000

Exercise 6:
During 2015, Eldred Corporation acquired a mineral mine for $1,500,000 of which $200,000 was ascribed to
land value after the mineral has been removed. Geological surveys have indicated that 10 million units of the
mineral could be extracted. During 2015, 1,500,000 units were extracted and 1,200,000 units were sold.
What is the amount of depletion expensed for 2015?
a.130,000
 ‫ ﺧﻠﻲ ﺑﺎﻟك ھﺗﯾﺟﻲ‬COGS ‫ ھﻧﺎ ھو ﯾﻘﺻد ﺑﯾﮭﺎ ال‬expensed ‫ﻛﻠﻣﺔ‬
b.156,000
c.180,000 1st: Depletion .rate /unit =
𝒄𝒐𝒔𝒕 𝟏,𝟓𝟎𝟎,𝟎𝟎𝟎 𝒔𝒂𝒍𝒗𝒂𝒈 𝟐𝟎𝟎,𝟎𝟎𝟎
= $0.13/ton
d.195,000 𝒕𝒐𝒕𝒂𝒍 𝒖𝒏𝒊𝒕𝒔 𝟏𝟎,𝟎𝟎𝟎,𝟎𝟎𝟎𝒖

COGS = Units sold x depletion rate = Xx

COGS = 1,200,000 u x $0.13 = $156,000

Exercise 7:
In 2011, Horton Company purchased a tract of land as a possible future plant site. In January, 2019, valuable
sulphur deposits were discovered on adjoining property and Horton Company immediately began
explorations on its property. In December, 2019, after incurring €400,000 in exploration costs, which were
accumulated in an expense account, Horton discovered sulphur deposits appraised at €2,250,000 more than
the value of the land. To record the discovery of the deposits, Horton should
a. make no entry.
b. debit €400,000 to an asset account.
c. debit €2,250,000 to an asset account.
d. debit €2,650,000 to an asset account.

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Exercise 8:
Balcom Corporation acquires a coal mine at a cost of £500,000. Intangible development costs total £120,000.
After extraction has occurred, Balcom must restore the property (estimated fair value of the obligation is
£60,000), after which it can be sold for £170,000. Balcom estimates that 5,000 tons of coal can be extracted,
If 900 tons are extracted the first year.
1-What is the amount of depletion per ton?
a. £102 b. £170 c. £100 d. £124
2-which of the following would be included in the journal entry to record depletion?
a. Debit to Accumulated Depletion £91,800
b. Debit to Inventory for £91,800
1ststep: Cost = 500,000 +120,000+60,000 =$680,000
c. Credit to Inventory for £90,000 𝒄𝒐𝒔𝒕 𝟔𝟖𝟎,𝟎𝟎𝟎 𝒔𝒂𝒍𝒗𝒂𝒈 𝟏𝟕𝟎,𝟎𝟎𝟎
d. Credit to Accumulated Depletion £153,000 2 step: Depletion .rate /unit = = $102/ton
nd
𝒕𝒐𝒕𝒂𝒍 𝒖𝒏𝒊𝒕𝒔 𝟓,𝟎𝟎𝟎𝒖
3rd step: Depletion cost = units extracted x depletion rate=xx
=900 u x $102 = $91,800
inventory 91,800
Accumu. Depletion 91,800

Exercise 9:
Giger Company acquired a tract of land containing an extractable mineral resource. Giger is required by the
purchase contract to restore the land to a condition suitable for recreational use after it has extracted the
mineral resource. Geological surveys estimate that the recoverable reserves will be 5,000,000 tons, and that
the land will have a value of €1,000,000 after restoration. Relevant cost information follows:
Land €7,000,000 Estimated restoration costs 1,500,000
If Giger maintains no inventories of extracted material, what should be the charge to depletion expense per
ton of extracted material?
a. €1.70
1ststep: Cost = 7,000,000 +1,500,000=8,500,000
b. €1.50 𝒄𝒐𝒔𝒕 𝟖,𝟓𝟎𝟎,𝟎𝟎𝟎 𝒔𝒂𝒍𝒗𝒂𝒈 𝟏,𝟎𝟎𝟎,𝟎𝟎𝟎
c. €1.40 2nd step: Depletion .rate /unit = = $1.5/ton
𝒕𝒐𝒕𝒂𝒍 𝒖𝒏𝒊𝒕𝒔 𝟓,𝟎𝟎𝟎,𝟎𝟎𝟎 𝒖
d. €1.20

Exercise 10:
In January 2019, Fehr Mining Corporation purchased a mineral mine for £4,200,000 with removable ore
estimated by geological surveys at 2,500,000 tons. The property has an estimated value of £400,000 after the
ore has been extracted. Fehr incurred £1,150,000 of development costs preparing the property for the
extraction of ore. During 2019, 340,000 tons were removed and 300,000 tons were sold. For the year ended
December 31, 2019, Fehr should include what amount of depletion in its cost of goods sold?
a. £516,800
b. £456,000 1ststep: Cost = 4,200,000 +1,150,000 =$5,350,000
𝒄𝒐𝒔𝒕 𝟓,𝟑𝟓𝟎,𝟎𝟎𝟎 𝒔𝒂𝒍𝒗𝒂𝒈 𝟒𝟎𝟎,𝟎𝟎𝟎
c. £594,000 2nd step: Depletion .rate /unit = = $1.98/ton
𝒕𝒐𝒕𝒂𝒍 𝒖𝒏𝒊𝒕𝒔 𝟐,𝟓𝟎𝟎,𝟎𝟎𝟎𝒖
d. £673,200
COGS = Units sold x depletion rate = Xx
=300,000u x $1.98 = $594,000
COGS 594,000
Inventory 594,000

Exercise 11:
On January 1, 2019, W. Poon Inc. purchased equipment with a cost of HK$4,668,000 a useful life of 12
years and no salvage value. The company uses straight-line depreciation. At December 31, 2019, the
company determines that impairment indicators are present. The fair value less cost to sell the asset
is estimated to be Hk$4,620,000. The asset’s value-in-use is estimated to be HK$4,305,000. There is
no change in the asset’s useful life or salvage value. The 2019 income statement will report Loss on
Impairment of
a. HK$0.
b. HK$26,000.
c. HK$48,000.
d. HK$341,000

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Question 2 :true &false questions:
1. Changes in estimates are handled prospectively by dividing the asset’s book value less
any residual value by the remaining estimated life .
2.depreciation ,depletion and amortization all involve the allocation of the cost of a long Lived assets
to expense.
3. Under component depreciation, each component of an item of property, plant and equipment
whose cost is significant relative to the total cost of the asset must be depreciated separately.
4. Component depreciation must be calculated using the straight-line method.

5.recoverable amount is defined as the higher of fair value less cost to sell or value in use.

6.assets held for disposal should be reported at the lower of cost or net realizable value.

7.an asset's value in use is defined as the present value of the cash flows expected from its future use
and eventual sale at the end of its useful life

8.a recovery of impairment loss for a tangible assets is limited to the carrying value that would have
been reported had the impairment not occurred.

9.after an impairment loss is recorded. the recoverable amounts becomes the basis for the impaired
assets and is used to calculate depreciation in the future periods.

10.an impairment loss is the amount by which the carrying amount of the assets exceeds the sum of
the expected future cash flow from the use of that assets.

11.the first step in determining an impairment loss is to identify whether impairment indicators are
present .

12.the recoverable amount used to impairment test a Long lived tangible asset is defined as the
asset's fair value less cost to sell .

13.Assets held for disposal should be reported at the Lower of cost or net realizable value .
14.Intangible development costs and restoration costs are Part of the depletion base .

1-T 2-T 3-T 4-F 5-T 6-T 7-T 8-T 9-T 10-F
11-T 12-F 13-T 14-T

question 3:Multiple choice questions (theoretical):

1. Depreciation is normally computed on the basis of the nearest
a. full month and to the nearest cent.
b. full month and to the nearest dollar.
c. day and to the nearest cent.
d. day and to the nearest dollar.

2. Myers Company acquired machinery on January 1, 2014 which it depreciated under the straight-line
method with an estimated life of fifteen years and no residual value. On January 1, 2019, Myers estimated that
the remaining life of this machinery was six years with no residual value. How should this change be
accounted for by Myers?
a. As a prior period adjustment
b. As the cumulative effect of a change in accounting principle in 2019
c. By setting future annual depreciation equal to one-sixth of the book value on January1, 2019
d. By continuing to depreciate the machinery over the original fifteen year life

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3. A change in estimate should
a. result in restatement of prior period statements. b. be handled in current and future periods.
c. be handled in future periods only. d. be handled retroactively.

4. Lynch Printing Company determines that a printing press used in its operations has suffered an impairment
in value because of technological changes. An entry to record the impairment should
a. recognize extra depreciation expense for the period.
b. include a credit to the equipment accumulated depreciation account.
c. include a credit to the equipment account.
d. not be made if the equipment is still being used.

5. All of the following are true with regard to impairment testing of long-lived assets except:
a. If impairment indicators are present, the company must conduct an impairment test.
b. The impairment test compares the asset’s carrying value with the lower of its fair value less cost to sell and its value-
in-use.
c. If the recoverable amount is lower than the carrying value, an impairment loss will be reported on the period
income statement.
d. If either the fair value less cost to sell or the value-in-use is higher than the carrying amount, no impairment loss

6. All of the following are true of the recoverable amount used in the impairment test of a long-lived asset
except:
a. An asset’s recoverable amount is the lower of its value-in-use and its fair value less cost to sell.
b. An asset’s recoverable amount is the higher of its fair value less cost to sell and its value-in-use.
c. The recoverable amount is calculated as the asset’s value in use less costs to sell.
d. If an asset’s recoverable amount is higher than the carrying amount, no impairment loss will be reported on the
period’s income statement.

7. Which of following is not a similarity in the accounting treatment for depreciation and cost depletion?
a. The estimated life is based on economic or productive life.
b. Assets subject to either are reported in the same classification on the statement of financial position.
c. The rates may be changed upon revision of the estimated productive life used in the original rate computations.
d. Both depreciation and depletion are based on time.

8. Which of the following is not a difference between the accounting treatment for depreciation and cost
depletion?
a. Depletion applies to natural resources while depreciation applies to plant and equipment.
b. Depletion refers to the physical exhaustion or consumption of the asset while depreciation refers to the wear, tear,
and obsolescence of the asset.
c. Many formulas are used in computing depreciation but only one is used to any extent in computing depletion.
d. The cost of the asset is the starting point from which computation of the amount of the periodic charge is made to
operations for depreciation, but the fair value reassessed each year as the starting point for the periodic charge for
depletion.

9. Depletion expense
a. is usually part of cost of goods sold. b. includes tangible equipment costs in the depletion base.
c. excludes intangible development costs from base. d. excludes restoration costs from the depletion base.

10. The most common method of recording depletion for accounting purposes is the
a. percentage depletion method. b. diminishing-charge method.
c. straight-line method. d. units-of-production method.

11. Of the following costs related to the development of mineral resources, which one is not a
part of depletion cost?
a. Acquisition cost of the mineral resource deposit
b. Exploration costs
c. Tangible equipment costs associated with machinery used to extract the mineral resource
d. Intangible development costs such as drilling costs, tunnels, and shafts

1-b 2-C 3-b 4-b 5-b 6-a

7-d 8-a 9-a 10-d 11-C

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Chapter 12: (intangible assets)

Exercise 1:
Lynne Corporation acquired a patent on May 1, 2015. Lynne paid cash of $40,000 to the seller. Legal
fees of $1,000 were paid related to the acquisition. What amount should be debited to the patent
account?
a. $1,000 cost of Patent = Purchase Price $40,000 + Legal cost$1,000 = $41,000
b. $39,000
c. $40,000
d. $41,000

Exercise 2:
Lopez corporation incurred $240,000 of research to develop a product for which a Patent was
granted on January 1,2010 .Legal fees and other costs associated with registration of the Patent
totaled $80,000 .on March 31,2015 .Lopez Paid $130,000 for Legal fees in a successfully defending
cost of Patent .the total amount capitalized for the Patent through March 31.2015 should be .
a. $ 210,000
b. $550,000 Total cost of Patent(march.31.2015) = $130,000 +$80,000 = $210,000
c. $500,000
d. $650,000

Exercise 3:
Contreras Corporation acquired a patent on May 1, 2019. Contreras paid cash of €35,000 to the
seller. Legal fees of €900 were paid related to the acquisition. What amount should be debited to the
patent account?
a. €900
b. €34,100 Patent Cost = acquisition Price +Legal Fees
c. €35,000 = 35,000 +9,000 = $35,900
d. €35,900.

Exercise 4:
Alonzo Co. acquires 3 patents from Shaq Corp. for a total of $300,000. The patents were carried on
Shaq’s books as follows: Patent AA: $5,111; Patent BB: $2,111; and Patent CC: $3,000. When Alonzo
acquired the patents their fair values were: Patent AA: $20,000; Patent BB: $240,000; and Patent CC:
$60,000. At what amount should Alonzo record Patent BB?
a. $100,000
Assets M.V M.V ratio Total Asset
b. $240,000
price cost
c. $2,000
Patent AA 20,000 20,000 /320,000 =6.25% X 300,000 18,750
d. $225,000
Patent BB 240,000 240,000 /320,000=75% X 300,000 225,000
Patent CC 60,000 60,000 /320,000=18.75% X300,000 56,250
Total 320,000 100%

Exercise 5:
Mini Corp. acquires a patent from Maxi Co. in exchange for 2,500 shares of Mini Corp.’s €5 par value
ordinary shares and €85,000 cash. When the patent was initially issued to Maxi Co., Mini Corp.’s
shares were selling at €7.50 per share. When Mini Corp. acquired the patent, its shares were selling
for €9 a share. Mini Corp. should record the patent at what amount?
a. € 97,500
b. €103,750 Cost of Patent = M.V of shares +any Cash Paid
c. €107,500 Patent = (2,500 #of shares x $9) +85,000 = $107,500
d. € 85,000

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 Page 15 of 61
Exercise 6:
On June 30, 2019, Cey, Inc. exchanged 2,000 shares of Seely Corp. €25 par value ordinary shares for a
patent owned by Gore Co. The Seely stock was acquired in 2019 at a cost of €55,000. At the exchange
date, Seely ordinary shares had a fair value of €48 per share, and the patent had a net carrying value
of €110,000 on Gore's books. Cey should record the patent at
a. €50,000.
b. €55,000. Cost of Patent = M.V of shares +any Cash Paid
c. €96,000. Patent = (2,000 #of shares x $48) +0= $96,000
d. €110,000.

Exercise 7:
On May 5, 2019, MacDougal Corp. exchanged 2,000 shares of its £25 par value ordinary treasury
shares for a patent owned by Masset Co. The treasury shares were acquired in 2018 for £45,000. At
May 5, 2019, MacDougal's ordinary shares was quoted at £38 per share, and the patent had a
carrying value of £68,000 on Masset's books. MacDougal should record the patent at
a. £45,000.
b. £50,000. Cost of Patent = M.V of shares +any Cash Paid
c. £60,000. Patent = (2,000 #of shares x $38) +0= $76,000
d. £76,000. share ‫ ﺑﺗﺎع ال‬market value ‫ ﺑﺎل‬Patent ‫ھﻧﺳﺟل ال‬

Exercise 8:
Ely Co. bought a patent from Baden Corp. on January 1, 2019, for €360,000. An independent
consultant retained by Ely estimated that the remaining useful life at January 1, 2019 is 15 years. Its
unamortized cost on Baden’s accounting records was €180,000; the patent had been amortized for 5
years by Baden. How much should be amortized for the year ended December 31, 2019 by Ely Co.?
a. €0. 𝒄𝒐𝒔𝒕 𝟑𝟔𝟎,𝟎𝟎𝟎 𝒔𝒂𝒍𝒗𝒂𝒈𝒆 𝒗𝒂𝒍𝒖𝒆 𝟎
b. €18,000. annual amortization = = $ 24,000/y
𝟏𝟓
c. €24,000. ‫ ﻛﺎﻧت‬Baden ‫ ﻣﺎﻟﯾش دﻋوه ﺑﻘﻲ اﻟﺷرﻛﮫ اﻟﺛﺎﻧﯾﮫ‬1/1/2019 ‫ اﺻﺑﺢ ﺑﺗﺎﻋﻧﺎ ﻣن ﯾوم‬Patent ‫ وال‬Ely ‫اﺣﻧﺎ ﺷرﻛﺔ‬
d. €36,000. ‫ﻣﺳﺟﻼه ﺑﻛﺎم‬

Exercise 9 :
Leeper Corporation incurred the following costs in 2010:
 Acquisition of R&D equipment with a useful life of 4 years $800,000
 Cost of making minor modifications to an existing product $140,000
 Advertising expense to introduce a new product $700,000
 Engineering costs to advance a product to full production stage $600,000
What amount should Leeper record as research & development expense in 2010?
a. $ 800,000
b. $ 940,000  R&D equipment depreciation expense =$800,000 ÷ 4 = $200,000
c. $1,300,000  Total R&D exp. in 2010 = 200,000 + 600,000 = $800,000
d. $1,640,000

Exercise 10:
The general ledger of Vance Corporation as of December 31, 2019, includes the following accounts:
Copyrights £ 30,000
Deposits with advertising agency (will be used to promote goodwill) 27,000
Bond sinking fund 70,000
Excess of cost over fair value of identifiable net assets of Acquired subsidiary 390,000
Trademarks 120,000
In the preparation of Vance's statement of financial position as of December 31, 2019,
what should be reported as total intangible assets?
a. £510,000.
b. £537,000. Cost of intangible assets = Copyright $30,000 +Goodwill$390,000 +
c. £540,000. Trade Marks $120,000 = $540,000
d. £537,000.

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 Page 16 of 61
Exercise 11 :
On January 2, 2015, Klein Co. bought a trademark from Royce, Inc. for $1,200,000. The remaining
useful life of the trademark was 10 years. Its unamortized cost on Royce’s books was $900,000. In
Klein’s 2015 income statement, what amount should be reported as amortization expense?
a. $120,000.
b. $ 90,000. Amortization will :
𝒄𝒐𝒔𝒕 𝟏,𝟐𝟎𝟎,𝟎𝟎𝟎 𝒔𝒂𝒍𝒗𝒂𝒈𝒆 𝒗𝒂𝒍𝒖𝒆 𝟎
c. $ 60,000. annual amortization = = $ 120,000/y
𝟏𝟎
d. $ 45,000.

Exercise 12:
Assume that Green Market Inc. acquires the customer list of a large newspaper for $9,000,000 on
January 1, 2010. Green Market expects to benefit from the information evenly over a three-year
period & it can sell the list for $90,000 to another co at the end of 3 years.
1-What is the amount of amortization expense at the end of 2010?
a.$2,400,000 b.$1,800,000 c.$2,970,000 d.$1,050,000
2-calculate the book value of Patent at the end of 2010?
a.$2,700,000 b.$6,300,000 c.$6,030,000 d.$5,750,000
solution
Acquisition entry entry will be 1/1/2010:
Customer List(+) 9,000,000
Cash(-) 9,000,000
At 31/12/2010 Amortization entry will be:
, , ,
 Amortization expense = = $𝟐, 𝟗𝟕𝟎, 𝟎𝟎𝟎/𝒚
Amortization expense(+) 2,970,000
Accumulated amortization(+) 2,970,000
Book Value = cost 9,000,000 – Accumulated amortization 2,970,000 = $ 6,030,000
Exercise 13 :
Jeff Corporation purchased a limited-life intangible asset for $150,000 on May 1, 2013. It has a useful
life of 10 years. What total amount (accumulated) of amortization expense should have been
recorded on the intangible asset by December 31, 2015?
a. $ -0-
Amortization entry will :
b. $30,000 𝒄𝒐𝒔𝒕 𝟏𝟓𝟎,𝟎𝟎𝟎 𝒔𝒂𝒍𝒗𝒂𝒈𝒆 𝒗𝒂𝒍𝒖𝒆 𝟎
c. $40,000 annual amortization = = $ 15,000/y
𝟏𝟎
d. $45,000 Amortization 2013 from oct to dec (8 months) =15,000 x8/12 = $10,000
Amortization 2014 from dec =15,000
Amortization 2015 from dec =15,000
total amortization (accumulated amortization ) = 10,000+15,000+15,000=40,000

Exercise 14:
Thompson Company incurred research and development costs of $100,000 and legal fees of $50,000
to acquire a patent. The patent has a legal life of 20 years and a useful life of 10 years. What amount
should Thompson record as Patent Amortization Expense in the first year?
a. $0.
b. $ 5,000. Amortization entry will :
𝒄𝒐𝒔𝒕 𝟓𝟎,𝟎𝟎𝟎 𝒔𝒂𝒍𝒗𝒂𝒈𝒆 𝒗𝒂𝒍𝒖𝒆 𝟎
c. $ 7,500. annual amortization = = $ 5,000/y
𝟏𝟎
d. $15,000.
Exercise 15:
Platteville Corporation has the following account balances at 12/31/19:
Amortization expense € 10,000
Goodwill 140,000
Patents, net of €30,000 amortization 90,000
What amount should Platteville report for intangible assets on the statement of financial position?
a. € 90,000
b. €120,000 €140,000 + €90,000 = €230,000.
c. €230,000
d. €240,000

FB :Moustafa marzouk (accounting) for faculty of commerce English section-01228988832

 Page 17 of 61
Exercise 16 :
Rich corporation Purchased a Limited Life intangible assets for $270,000 on May 1,2013,it has a useful life of
10 years .what a total amount of amortization expense should have been recorded as intangible assets at
December 31.2015
a. $0. Amortization will :
b. $ 54,000. 𝒄𝒐𝒔𝒕 𝟐𝟕𝟎,𝟎𝟎𝟎 𝒔𝒂𝒍𝒗𝒂𝒈𝒆 𝒗𝒂𝒍𝒖𝒆 𝟎
c. $ 72,000. annual amortization = = $ 27,000/y
𝟏𝟎
d. $81,000. amortization for 2013 (8 months only )= 27,000 x 8/12 = 18,000
amortization 2014 = $27,000
amortization 2015 = $27,000
total amortization should be recorded at 2015 = $18,000+27,000+27,000 = 72,000

Exercise 17:
.ELo corporation purchased a patent for 135,000 on September 1,2013 . it had a useful life of 10 years
. on jan 1 ,2015 ELO corporation spent 33,000 to succefully defend the patent in a Lawsuit . ELo feels
that as of that date , the remaining useful life is 5 years.
1) What amount should be reported for patent amortization expense for 2015?
a.30,900 before defending cost
b.30,000 Amortization for 2011 should be calculated as follows:
c.28,200 (old amortization ) = cost 135,000 /useful life 10 = 13,500
d.23,400 Amortization expense from 1/9/2013 to 31/12/2013 = 13,500 x 4/12 = 4,500
Amortization expense for 2014 = 13,500
( amortization):after Defending cost
New book value = 135,000 – 4,500- 13,500 +33,000 =150,000
New amortization expense = 150,000 / 5 years =$30,000

Exercise 18:
Day company purchased a patent on jan 1 ,2104 for $480,000. The patent had a remaining useful life
of 10 years at that date. In January of 2015, Day successfully defends the patent at accost of $216,000.
Extending the paten's Life to 31/12/2026 what amount of amortization expense recorded in 2015?
a.48,000
b.54,000 Amortiztion of Dec.21014 = 480,000 /10 = 48,000
BV2015 = 480,000 -48,000 +216,000 = 648,000
c.58,000
Reamining useful life = New life (13) – used life (1) = 12 years (remaining)
d.72,000 Amortization = 648,000 /12 = 54,000

Exercise 19:
on january 1,2011 ,Russell company purchased a copyright for $1,200,000,having an estimated
useful life of 16 years , in January 2015 .Russell Paid $180,000 for legal fees in a successfully
defending cost of copyright ,copyright amortization expense for the year ended December 31,2015
should be
a. $ 23,000 before defending cost
b. $75,000 Cost (copyright)= $1,200,000
c. $86,250 Amortization for 2011 should be calculated as follows:
d. $90,000 (old amortization ) = cost 1,200,000 /useful life 16 = 75,000/y
Amortization expense from 1/1/2011 to 1/1/2015 = 75,000x 4y = 300,000
( amortization):after Defending cost
New book value = 1,200,000 – 300,000+180,000=1,080,000
New amortization expense = New BV 1,080,000/ remaining life 12 years
=$90,000

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 Page 18 of 61
Exercise 20:
A company acquires a patent for a drug with a remaining legal and useful life of six years on January
1, 2017 for £2,100,000. The company uses straight-line amortization for patents. On January 2, 2019,
a new patent is received for a timed-release version of the same drug. The new patent has a legal and
useful life of twenty years. The least amount of amortization that could be recorded in 2019 is
a. £350,000.
𝒄𝒐𝒔𝒕 𝟐,𝟏𝟎𝟎,𝟎𝟎𝟎 𝒔𝒂𝒍𝒗𝒂𝒈𝒆 𝒗𝒂𝒍𝒖𝒆 𝟎
b. £ 70,000. annual amortization = = $ 350,000/y
𝟔
c. £ 95,454.
amortization 2017 = $350,000
d. £ 80,500.
amortization..2018 = $350,000
Accumulated Amortization = 350,000 +350,000 = 700,000
BV at 1/1/2019 = 2,100,000 – 700,000 = 1,400,000
𝑵𝒆𝒘 𝑩𝑽 𝟏,𝟒𝟎𝟎,𝟎𝟎𝟎 𝒔𝒂𝒍𝒗𝒂𝒈𝒆 𝒗𝒂𝒍𝒖𝒆 𝟎
New amortization = = $ 70,000/y
𝟐𝟎

Exercise 21 :
Danks corporation Purchased a Patent for $540,000 on September 1,2013 .it had a useful life 10
years , on January 1,2015 .Danks spent $132,000 to successfully defend the Patent lawsuit.Danks
feels that Now ,the remaining Life is 5 years .what amount that should be reported for Patent
amortization expense for 2015?
a. $134,400. Amortization will :
b. $ 120,000. 𝒄𝒐𝒔𝒕 𝟓𝟒𝟎,𝟎𝟎𝟎 𝒔𝒂𝒍𝒗𝒂𝒈𝒆 𝒗𝒂𝒍𝒖𝒆 𝟎
annual amortization = = $ 54,000/y
c. $ 123,600. 𝟏𝟎
d. $ 145,000. amortization for 2013 (4 months only )= 54,000 x 4/12 = 18,000
amortization 2014 = $54,000
amortization till Dec.31.2014 = $54,000+18,000 = 72,000
at 1/1/2015 when successfully defending occur
New B.V= cost 540,000 – 72,000 amortization +132,000 successfully =600,000
𝑵𝒆𝒘 𝑩.𝑽𝟔𝟎𝟎,𝟎𝟎𝟎 𝒔𝒂𝒍𝒗𝒂𝒈𝒆 𝒗𝒂𝒍𝒖𝒆 𝟎
annual amortization = = $ 120,000/y
𝟓

Exercise 22:
In jan 1,2010 , findley corporation purchased a patent for a new consumer product for $840,000 . at
the time of purchase , the patent was valid for fifteen years. Due to the competitive nature of the
product, however,the patent was estimated to have a useful life of only ten years. During 2015 the
product was permanently removed from the market under governmental order because of a
potential health hazard present in the product. What amount should findley charge to expense
during 2015 , assuming amortization is recorded at the end each year?
a.$56hv 0,000 amortization = 840,000 /10 = 84,000
b.$420,000 amortization for 5 years = 84,000 x 5 = 420,000
c.$84,000 which means BV of patent = 840,000 – 420,000 = 420,000
d.56,000 on 2015 the product was permanently removed from the market " which
means there is a loss by 420,000 (Amortization expense for last year 2015
= 420,000 /1 = $420,000

Exercise 23:
January 2, 2016, Koll, Inc. purchased a patent for a new consumer product for €450,000.
At the time of purchase, the patent was valid for 15 years; however, the patent’s useful life was
estimated to be only 10 years due to the competitive nature of the product. On December 31, 2019,
the product was permanently withdrawn from the market under governmental order because of a
potential health hazard in the product. What amount should Koll charge against income during 2019,
assuming amortization is recorded at the end of each year?
a. € 45,000 𝒄𝒐𝒔𝒕 𝟒𝟓𝟎,𝟎𝟎𝟎 𝒔𝒂𝒍𝒗𝒂𝒈𝒆 𝒗𝒂𝒍𝒖𝒆 𝟎
b. €270,000 annual amortization = = $ 45,000/y
𝟏𝟎
c. €315,000 Accumulated Amortization = 45,000 x 3 years = 135,000
d. €360,000 BV = 450,000 – 135,000 = 315,000

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 Page 19 of 61
Exercise 24:
A company acquires a patent for a drug with a remaining legal and useful life of six years on January 1, 2017
for £2,100,000. The company uses straight-line amortization for patents. On January 2, 2019, a new patent is
received for a timed-release version of the same drug. The new patent has a legal and useful life of twenty
years. The least amount of amortization that could be recorded in 2019 is
a. £350,000.
𝒄𝒐𝒔𝒕 𝟐,𝟏𝟎𝟎,𝟎𝟎𝟎 𝒔𝒂𝒍𝒗𝒂𝒈𝒆 𝒗𝒂𝒍𝒖𝒆 𝟎
b. £ 70,000. annual amortization = = $ 350,000/y
𝟔
c. £ 95,454.
amortization 2017 = $350,000 & amortization..2018 = $350,000
d. £ 80,500.
Accumulated Amortization = 350,000 +350,000 = 700,000
BV at 1/1/2019 = 2,100,000 – 700,000 = 1,400,000
𝑵𝒆𝒘 𝑩𝑽 𝟏,𝟒𝟎𝟎,𝟎𝟎𝟎 𝒔𝒂𝒍𝒗𝒂𝒈𝒆 𝒗𝒂𝒍𝒖𝒆 𝟎
New amortization = 𝟐𝟎
= $ 70,000/y

Exercise 25:
MC corporation purchased a patent for 135,000 on September 1,2013 . it had a useful life of 10 years . on jan 1
,2015 Mc corporation spent 50,000 to succefully defend the patent in a Lawsuit . ELo feels that as of that date ,
the remaining useful life is 5 years.
1) What amount should be reported for patent amortization expense for 2015?
a.30,900
before defending cost
b.30,000 Amortization for 2013 should be calculated as follows:
c.28,200 (old amortization ) = cost 135,000 /useful life 10 = 13,500
d.33,400 Amortization expense from 1/9/2013 to 31/12/2013 = 13,500 x 4/12 = 4,500
Amortization expense for 2014 = 13,500
(amortization):after Defending cost
New book value = 135,000 – 4,500- 13,500 +50,000 =167,000
New amortization expense = 167,000 / 5 years =33,400

Exercise 26:
Maram corporation purchased a patent for 450,000 on may 1,2010 . it had a usefullife of 10 years. On july 1
,2012 Silva spent $110,000 to successfully defend the patent in a Lawsuit. Maram feels that as of that date the
remaining life is 5 years.
1) amortization expense for 2012 before defending cost will be :
a)45,000 b)30,000 c)22,500 d) 68,000
2)amortization expense for 2012 after defending cost will be:
a)45,000 b)30,000 c)22,500 d) 68,750

before defending cost

Amortization from may 1.2010 to july 1 2012:
(old amortization ) = cost 450,000 /useful life 10 = 45,000
Amortization expense from 1/5/2010 to 31/12 /2010 = 45,000 x 8/12 = 30,000
Amortization expense for 2011 = 45,000
Amortization expense for 2012 = 45,000 x 6/12 = 22,500
( amortization):after Defending cost
New book value = 450,000 -30,000-45,000-22,500 +110,000 = 462,500
New amortization expense = 462,500 / 5 years =92,500
Amortization 1/7 to 31/12 = 92,500 x 6/12 = 46,250
Amortization 2012 = 22,500 +46,250 = 68,750

Exercise 27:
Sisco co. purchased a patent from thornton co. for 180,000 on july 1 ,2008 . expenditures of $68,000 for successful
litigation in defense of the patent were paid on july 1,2011 .sisco estimates that the useful life of the patent will be 20
years from the date of acquisition. Prepare a computation of the carrying value (B.V) of the patent at Dec. 31,2011.
A.215,000
b.153,000 before defending cost
c.214,500 Cost $180,000 & usefullife 20 years
d.221,000 (old amortization ) = cost 180,000 /useful life 20 = 9,000/y
Amortization from July 1.2008 to july 1 2011: = 9,000 x 3y = 27,000
( amortization):after Defending cost
New book value = 180,000 -27,000+68,000= 221,000
New amortization expense = (New BV 221,000 / 17Remaining years )=13,000
Amortization 1/7/2011 to 31/12/2011 = 13,000 x 6/12 = 6,500
book value(at 31/12/2011) = 221,000 -6,500 = 214,500

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 Page 20 of 61
Exercise 28 :
In early January 2014, Lamy Corporation applied for a patent, incurring legal costs of $60,000. In January
2015, Lamy incurred $9,000 of legal fees in a successful defense of its patent.
Instructions: Compute 2014 amortization, 12/31/14 carrying value, 2015 amortization, and 12/31/15
carrying value if the company amortizes the patent over 10 years.
A.15,000
b.53,000 before defending cost 2014:
 Cost of patent on 1/1/2014 = $60,000
c.56,000
 Annual Amortization exp. for 2014= $60,000 ÷ 10 = $6,000.
d.21,000
 BV on 31/12/2014 = $60,000 -$6,000 = $54,000
(new amortization):after Defending cost 2015;
 New Cost on 1/1/2015 = $54,000 +$9,000 = $63,000
 Remaining useful life = 10 – 1 = 9 years
 New Amortization exp. For 2015 = $63,000 ÷ 9 = $7,000.
 BV 31/12/2015 = $63,000 - $7,000 = $56,000

Exercise 29:
Presented below is selected information for Palmiero Company. Instructions: Answer the questions asked about
each of the factual situations.
1. Palmiero purchased a patent from Vania Co. for $1,500,000 on January 1, 2013. The patent is being
amortized over its remaining legal life of 10 years, expiring on January 1, 2023. During 2015, Palmiero
determined that the economic benefits of the patent would not last longer than 6 years from the date of
acquisition. What amount should be reported in the statement of financial position for the patent, net of
accumulated amortization, at December 31, 2015?
a.900,000
b.300,000 amortization = cost 1,500,000 / 10 years = 150,000
c.600,000 amortization 2013 = 150,000
d.1,200,000 amortization 2014 = 150,000
‫ اﻋﺘﺒﺮ اﻟﻤﺴﺄﻟﮫ ﺟﺪﯾﺪه‬2015 ‫ﻣﻦ‬
New BV = cost 1,500,000 – accumulated (150,000 x2) 300,000 = 1,200,000
Remaining life = new life (6) – used life (2) = 4 years (remaining)
New amortization = new BV 1,200,000 / 4 remaining life = 300,000
Amortization expense 300,000
Patent 300,000
Book value at the end of 2015 after calculating amortization
= 1,200,000 – 300,000 = 900,000
2. Palmiero bought a franchise from Dougherty Co. on January 1, 2014, for $350,000. The carrying amount of
the franchise on Dougherty’s books on January 1, 2014, was $500,000. The franchise agreement had an
estimated useful life of 30 years. Because Palmiero must enter a competitive bidding at the end of 2023, it is
unlikely that the franchise will be retained beyond 2023. What amount should be amortized for the year
ended December 31, 2015?
a.48,000 ‫ وﻣﺎﻟﯾش دﻋوه ان ﺷرﻛﺔ‬350,000 ‫ اﺷﺗرﯾﻧﺎ اﻻﺻل ب‬Palmiero ‫ﺧﻠﻲ ﺑﺎﻟك ھﻧﺎ اﺣﻧﺎ ﺷرﻛﺔ‬
b.35,000 500,000 ‫ ﻣﺳﺟﻼه ﻓﻲ دﻓﺎﺗرھﺎ ب‬Dougherty
c.58,000
Amortization expense = 350,000 /10 = 35,000/year
So amortization expense for Dec.31.2015 = 35,000
d.72,000

3) On January 1, 2013, Palmiero incurred organization costs of $275,000 to create a Patent for five years
useful life . What amount of amortization expense should be
reported in 2015?
amount of expense 2015 = zero
275,000 considered R&D expenses , so there is no cost or amortization.
4) Palmiero purchased the license for distribution of a popular consumer product on January 1, 2015, for
$150,000. It is expected that this product will generate cash flows for an indefinite period of time. The license
has an initial term of 5 years but by paying a nominal fee, Palmiero can renew the license indefinitely for
successive 5-year terms. What amount should be amortized for the year ended December 31, 2015?
cost = 150,000 , useful life = indefinite
so there is no amortization expense

FB :Moustafa marzouk (accounting) for faculty of commerce English section-01228988832

 Page 21 of 61
Exercise 30 :
Hall Co. incurred research and development costs in 2011 as follows:
1-Materials used in research and development project $450,000
2-Equipment acquired that will have alternate future uses in future
research and development projects 3,000,000
3-Depreciation for 2011 on above equipment 300,000
4-Personnel costs of persons involved in research and development $750,000
5-Consulting fees paid to outsiders for research and development $300,000
6-Indirect costs reasonably allocable to research and development $225,000
Total $5,025,000
The amount of research and development costs charged to Hall's 2011 income statement should be:
a. $1,500,000.
b. 1,900,000. Research and development Exp=
c. $2,025,000. 450,000 +300,000 +750,000 +300,000 +225,000 = 2,025,000
d. $4,500,000

Exercise 31:
Loazia Inc. incurred the following costs during the year ended December 31, 2019:
Laboratory research aimed at discovery of new knowledge €200,000
Costs of testing prototype and design modifications (economic viability not achieved) 45,000
Quality control during commercial production, including routine testing of products 270,000
Construction of research facilities having an estimated useful life of 6 years
but no alternative future use 360,000
The total amount to be classified and expensed as research and development in 2019 is
a. €515,000.
b. €875,000. Research and development Exp=
c. €605,000. €200,000 + €45,000 + €360,000= 605,000
d. €315,000.

Exercise 32 :
During 2019, Leon Co. incurred the following costs:
Testing in search for process alternatives € 380,000
Costs of marketing research for new product 250,000
Modification of the formulation of a process 510,000
Research and development services performed by Beck Corp. for Leon 425,000
In Leon's 2019 income statement, research and development expense should be
a. €510,000.
b. €935,000. €380,000 + €510,000 + €425,000 = €1,315,000.
c. €1,315,000.
d. €1,565,000.

Exercise 33:
Riley Co. incurred the following costs during 2019:
Significant modification to the formulation of a chemical product €160,000
Trouble-shooting in connection with breakdowns during commercial production 150,000
Cost of exploration of new formulas 200,000
Seasonal or other periodic design changes to existing products 185,000
Laboratory research aimed at discovery of new technology 275,000
In its income statement for the year ended December 31, 2019, Riley should report research and development
expense of
a. €635,000.
€160,000 + €200,000 + €275,000 = €635,000.
b. €785,000.
c. €820,000.
d. €970,000.

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2) Goodwill
Exercise 1:
Blue Sky Company’s 12/31/15 statement of financial position reports assets of $5,000,000 and
liabilities of $2,000,000. All of Blue Sky’s assets’ book values approximate their fair value, except for
land, which has a fair value that is $300,000 greater than its book value. On 12/31/2015, Horace
Wimp Corporation paid $5,400,000 to acquire Blue Sky. What amount of goodwill should Horace
Wimp record as a result of this purchase?
a. $ -0-
Acquisition price = $5,400,000
b. $400,000 Net assets (FV) = Assets ($5,000,000 + $300,000) – Liabilities $2,000,000 = $3,300,000
c. $2,100,000 Good will = acquisition price – F.V of net assets acquired
d. $2,400,000 Goodwill = $5,400,000 - $3,300,000 = $2,100,000.

Exercise 2:
Dotel Company’s 12/31/15 statement of financial position reports assets of $6,000,000 and
liabilities of $2,500,000. All of Dotel’s assets’ book values approximate their fair value, except for
land, which has a fair value that is $400,000 greater than its book value. On 12/31/15, Egbert
Corporation paid $6,500,000 to acquire Dotel. What amount of goodwill should Egbert record as a
result of this purchase?
a. $ -0- Acquisition price = $6,500,000
b. $ 500,000 FMV of net assets acquired =
c. $2,600,000 [Assets at book values + revaluations ] - Liabilities
d. $3,000,000 (6000,000 + 400,000) – 2500,000 = 3900,000
Good will = acquisition price – F.V of net assets acquired
Goodwill = $6,500,000 - $3,900,000 = $2,600,000.

Exercise 3:
Floyd Company purchases Haeger Company for $840,000 cash on January 1, 2016. The book value of
Haeger Company’s net assets, as reflected on its December 31, 2015 statement of financial position
is $620,000. An analysis by Floyd on December 31, 2015 indicates that the fair value of Haeger’s
tangible assets exceeded the book value by $60,000, and the fair value of identifiable intangible
assets exceeded book value by $45,000. How much goodwill should be recognized by Floyd Company
when recording the purchase of Haeger Company?
a. $ -0-
b. $220,000 Purchase Price 840,000
c. $160,000 FMV of net assets acquired =
d. $115,000 Book values of net assets 620,000
+ revaluation of tangible assets 60,000
+ revaluation of intangible assets 45,000 (725,000)
===GW 115000

Exercise 4:
Grande Company purchases Enfant Company for €14,485,000 cash on January 1, 2016. The book
value of Enfant Company’s net assets reported on its December 31, 2115 statement of financial
position was €12,620,000. Grande's December 31, 2015 analysis indicated that the fair value of
Enfant's tangible assets exceeded the book value by €860,000, and the fair value of identifiable
intangible assets exceeded book value by €145,000. How much goodwill should be recognized by
Grande Company when recording the purchase of Enfant?
a. $ -0-
b. €860,000 Acquisition price = $14,485,000
c. €1,865,000 Net assets (FV) = Assets $12,620,000+860,000+145,000)=$13,625,000
d. €2,870,000 Good will = acquisition price – F.V of net assets acquired
Goodwill = $14,485,000 - $13,625,000 = $860,000.

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Exercise 5:
During 2015, Bond Company purchased the net assets of May Corporation for $1,300,000. On the
date of the transaction, May had $300,000 of liabilities. The fair value of May's assets when acquired
were as follows:
Current assets $ 540,000
Noncurrent assets 1,260,000
$1,800,000
How should the $200,000 difference between the fair value of the net assets acquired ($1,500,000)
and the cost ($1,300,000) be accounted for by Bond?
a. The $200,000 difference should be credited to retained earnings.
b. The $200,000 difference should be recognized as a gain.
c. The current assets should be recorded at $540,000 and the noncurrent assets should be recorded at
$1,060,000.
d. A deferred credit of $200,000 should be set up and then amortized to income over a period not to exceed
forty years. Acquisition price = $1,300,000
Net assets (FV) = Assets $1,800,000 – Liabilities $300,000 = $1,500,000
Good will = acquisition price – F.V of net assets acquired
Goodwill = $1,300,000 - $1,500,000 = $-200,000.
gain ‫ وھﯾﺗﺳﺟﻠو‬200,000 ‫اﺣﻧﺎ دﻓﻌﻧﺎ ﻓﻠوس اﻗل ﻣن ﻗﯾﻣﺔ اﻟﺷرﻛﮫ ﻓﻲ اﻟﺣﺎﻟﮫ دي اﺣﻧﺎ اﻟﻛﺎﺳﺑﻧﯾن ال‬

Exercise 6:
Vasques manufacturing company decided to expand further by purchasing wassserman company. The
balance sheet of wasserman company as of December 31,2011 was as follows:
Balancesheet (December 31,2011)
Assets Liabilities and equities
Cash 210,000 AP 375,000
Receivables 550,000 Common stock 800,000
Inventory 275,000 Retained earnings 885,000
Plant assets(net) 1,025,000
Total assets 2,060,000 Total liab and equities 2,060,000
As appraisal agreed to by the parties , indicated that the fair market value of the inventory was $ 350,000
and that fair market value of the plant asset was 1,225,000 the fair market value of the receivables is equal
to the amount reported on the balance sheet. The agreed purchase price was $2,075,000 and this amount
was paid in cash to the previous owners of wasserman company.
Instruction:
Determine the amount of goodwill (if any) implied in the purchase price of $2,075,000
Prepare the necessary entry for the purchase transaction in Vasquez co.
Solution
a)calculation of goodwill:
Purchase price 2,075,000
-net assets acquired (F.V)
CASH 210,000
Receivables 550,000
Inventory 350,000
Plant assets 1,225,000
-AP (375,000)
GOODWILL 115,000
B) purchase entry:
Cash 210,000
Receivables 550,000
Inventory 350,000
Plant assets 1,225,000
Goodwill 115,000
AP 375,000
Cash (amount paid) 2,075,000

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Exercise 7:
Fred Graf, owner of Graf Interiors, is negotiating for the purchase of Terrell Galleries. The statement of
financial position of Terrell is given form below.
TERRELL GALLERIES
STATEMENT OF FINANCIAL POSITION
AS OF DECEMBER 31, 2015
Buildings (net) $200,000 Share capital—ordinary $200,000
Equipment (net) 175,000 Retained earnings 25,000
Copyrights (net) 30,000 Accounts payable 50,000
Land 70,000 Long-term notes payable 300,000
Cash 100,000
Total assets $575,000 Total equity and liabilities $575,000
Graf and Terrell agree that:
1. Land is undervalued by $50,000.
2. Equipment is overvalued by $5,000.
Terrell agrees to sell the gallery to Graf for $380,000.
Instructions
Prepare the entry to record the purchase of Terrell Galleries on Graf’s books.
solution
1. Land under valued so we need to adjust it : (+)
So F.V of Land = 70,000 +50,000 = 120,000
2. Equipment over valued by 5,000 so we need to adjust it (-)
So F.V of equipment = 117,500 – 5,000 = 170,000
Good will = acquisition price – F.V of net assets acquired

Acquisition price 380,000

Net assets F.V
Cash 100,000
Land 120,000
building 200,000
equip 170,000
copyright 30,000
-liab (350,000)
Fair value of net assets 270,000
Good will 110,000
So the entry will be :
DR CR
Cash 100,000
Land 120,000
building 200,000
equip 170,000
copyright 30,000
Good will 110,000
AP 50,000
NP 300,000
cash 380,000

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3) Impairment of intangible
Exercise 1 : assets
Use the following information for questions 1 and 2.
On January 1, 2014, Bingham Inc. purchased a patent with a cost €2,320,000, a useful life of 5 years.
At December 31, 2015, the company determines that impairment indicators are present. The fair
value less costs to sell the patent is estimated to be €1,080,000. The patent's value-in-use is
estimated to be €1,130,000. The asset's remaining useful life is estimated to be 2 years.

1. Bingham's 2015 income statement will report Loss on Impairment of

a. €0. b. €262,000. c. €312,000. d. €1,190,000.
2. The company's 2016 income statement will report amortization expense for the patent of
a. $377,000. b. $464,000. c. $565,000. d. $1,190,000.
Solution
𝑪𝒐𝒔𝒕 𝒔𝒂𝒍𝒗𝒂𝒈𝒆 𝒗𝒂𝒍𝒖𝒆
amortiz.exp = 𝒖𝒔𝒆𝒇𝒖𝒍 𝒍𝒊𝒇𝒆
, ,
amortiz. exp/year = =$464,000/y

amortization expense 464,000

Patent (-) 464,000

Accumulated amortiz until dec.31.2015 = 464,000 x 2years = $928,000

Book value = cost 2,320,000 – accumulated amortization $928,000 = $1,392,000
Then Make impairment test :

Carrying amount(BV) Recoverable amount

compare
"1,392,000" 1,130,000

higher

Fair value – cost to sell Value in use

"1,080,000" "1,130,000"

there is impairment Loss ‫ ﺗﺪھﻮر ﺑﻘﯿﻤﺔ‬impairment ‫ﻛﺪه ﯾﺒﻘﻲ ﻓﻲ‬

Impairment Loss = recoverable $1,130,000 – carrying amount (BV)$1,392,000 = -$262,000 Loss

Impairment Loss 262,000

Patent (-) 262,000

2nd year 2016:

1. New B.V on jan 1,2016 = 1,392,000-262,000=1,130,000
2. New salvage value = $0
3. Remaining Life = 2
So amortization expense for 2016 Dec.31 :
. 𝒏𝒆𝒘 𝒔𝒂𝒍𝒗𝒂𝒈𝒆
New dep.exp = 𝒓𝒆𝒎𝒂𝒊𝒏𝒊𝒏𝒈 𝒍𝒊𝒇𝒆
, ,
New dep exp for 2106 = = 565,000
Amortization expense expense 565,000
Patent (-) 565,000

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Exercise 2:
On January 2, 2018, Lutz Inc. purchased a patent with a cost $1,880,000 a useful life of 4 years. At
December 31, 2018, and December 31, 2019, the company determines that impairment indicators
are present. The following information is available for impairment testing at each year end:
12/31/2018 12/31/2019
Fair value less costs to sell 1,430,000 840,000
Value-in-use 1,500,000 890,000
1. The company's 2018 income statement will report
a. Amortization Expense of 470,000
b. Amortization Expense of 470,000 and Loss on Impairment of 20,000.
c. Amortization Expense of 470,000 and a Recovery of Impairment of 90,000.
d. Loss on impairment of 380,000.
2. The company's 2019 income statement will report
a. Amortization Expense of 470,000.
b. Amortization Expense of 500,000 and Loss on Impairment of 110,000.
c. Amortization Expense of 470,000 and a Loss on Impairment of 50,000.
d. Loss on impairment of 140,000.
Solution
𝑪𝒐𝒔𝒕 𝒔𝒂𝒍𝒗𝒂𝒈𝒆 𝒗𝒂𝒍𝒖𝒆
amortiz.exp = 𝒖𝒔𝒆𝒇𝒖𝒍 𝒍𝒊𝒇𝒆
, ,
amortiz. exp/year = =$470,000/y

amortization expense 470,000

Patent (-) 470,000

Accumulated amortiz until dec.31.2018 = 470,000 x 1years = $470,000

Book value = cost 1,880,000 – accumulated amortization $470,000 = $1,410,000
Then Make impairment test :

Carrying amount(BV) Recoverable amount

compare
"1,410,000" 1,500,000

higher

Fair value – cost to sell Value in use

"1,430,000" "1,500,000"

Impairment Loss = recoverable $1,500,000 – carrying amount (BV)$1,410,000 = +90,000 No Impairment

2nd year 2019:
‫ ﺳﻧﮫ ﻛﺎﻣﻠﮫ ﻋﺎدي‬amortization ‫ ﺑﻛد ھﯾﻘل ﺑﻘﯾﻣﺔ ال‬impairment ‫ﻣﺎ ﺣﺻﻠش‬
amortization expense 470,000
Patent (-) 470,000

Accumulated amortiz until dec.31.2019 = 470,000 + 470,000 = $940,000

Book value = 1,880,000 – 940,000 = 940,000
Then Make impairment test :

Carrying amount(BV) Recoverable amount

compare
"940,000" 890,000

higher

Fair value – cost to sell "840,000” Value in "890,000"

Impairment Loss = recoverable $890,000 – carrying amount (BV)$940,000 = -50,000 Impairment loss
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Exercise 3:
On June 2, 2018, Lindt Inc. purchased a trademark with a cost €9,440,000. The trademark is
classified as an indefinite-life intangible asset. At December 31, 2018 and December 31, 2019, the
following information is available for impairment testing:
12/31/2018 12/31/2019
Fair value less costs to sell €9,115,000 €9,050,000
Value-in-use €9,370,000 €9,550,000
The 2019 income statement will report
a. no Impairment Loss or Recovery of Impairment.
b. Impairment Loss of €70,000.
c. Recovery of Impairment of €70,000.
d. Recovery of Impairment of €180,000.
Solution
Since trademark is an indefinite-life intangible ====No amortization so CV = Cost
Then Make impairment test :

Carrying amount(BV) Recoverable amount

compare
"9,440,000" 9,370,000

Impairment Loss = recoverable $9,370,000 – carrying amount (BV)$9,440,000 = -$70,000 Loss

Impairment Loss 70,000
Patent (-) 70,000
BV= 9,440,000 – 70,000 = 9,370,000
Dec 31, 2019
Then Make impairment test :

Carrying amount(BV) Recoverable amount

compare
"9,370,000" 9,550,000

there is NO impairment Loss CV 9,370,000 ˂ RA 9,550,000

=====Recovery of impt loss But TAKE CARE; the upper limit for the asset to reach is its CV before
impt (9,440,000); Recovery of impt loss is only 70,000
Exercise 4:
India Enterprises has four divisions. It acquired one of them, Bombay Products, on January 1, 2019
for $400,000, and recorded goodwill of $50,750as a result of that purchase. At December 31, 2019,
Bombay Products had a recoverable amount of $375,000. The carrying value of the company’s net
assets at December 31, 2019 was $355,000(including goodwill). What amount of loss on impairment
of goodwill should India record in 2019?
a. $ -0- b. $20,000,000
a Recoverable amount > Carrying value
c. $25,000,000 d. $45,000,000

Exercise 5:
Chow Company purchased the Chee Division in 2019 and appropriately recorded $6,000 of goodwill related to
the purchase. On December 31, 2019, the recoverable amount of Chee Division is $68,000 and it is carried on
Chow’s books for a total of $64,000, including the goodwill. What goodwill impairment should be recognized
by Chow in 2019?
a. $0. b. $2,000 a Recoverable amount > Carrying value
c. $4,000 d. $10,000 $68,000 > $64,000

Exercise 6:
Tokyo Enterprises has four divisions. It acquired on of them, Green Products, on January 1, 2019 for
¥640,000,000, and recorded goodwill of ¥81,200 as a result of that purchase. At December 31, 2019, Green
Products had a recoverable amount of ¥592,000. The carrying value of the Company’s net assets at December
31, 2019 was ¥568,000 (including goodwill). What amount of loss on impairment of goodwill should Tokyo
record in 2019?
a. ¥ -0- b. ¥24,000,000 c. ¥48,000,000 d. ¥72,000,000

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Exercise 7:
On June 2, 2015, Olsen Inc. purchased a trademark with a cost €2,360,000. The trademark is
classified as an indefinite-life intangible asset. At December 31, 2015 and December 31, 2016, the
following is available for impairment testing:
12/31/2015 12/31/2016
Fair value less costs to sell €2,280,000 €2,265,000
Value-in-use €2,340,000 €2,390,000
The 2016 income statement will report
a. no Impairment Loss or Recovery of Impairment.
b. Impairment Loss of €20,000.
c. Recovery of Impairment of €20,000.
d. Recovery of Impairment of €50,000.
Solution
Since trademark is an indefinite-life intangible
====No amortization so CV = Cost
Then Make impairment test :

Carrying amount(BV) Recoverable amount

compare
"2,360,000" 2,340,000

higher

Fair value – cost to sell Value in use

"2,280,000" "2,340,000"

there is impairment Loss

Impairment Loss = recoverable $2,340,000 – carrying amount (BV)$2,360,000 = -$20,000 Loss
Impairment Loss 20,000
Trade Mark (-) 20,000

Dec 31, 2016

Then Make impairment test :

Carrying amount(BV) Recoverable amount

compare
"2,340,000" 2,390,000

higher

Fair value – cost to sell Value in use

"2,265,000" "2,390,000"

CV 2,340,000 ˂ RA 2,390,000
there is NO impairment Loss
=====Recovery of impt loss
But TAKE CARE; the upper limit for the asset to reach is its CV before impt (2360,000);
otherwise the cost principle is violated (i.e. the asset will be recorded above its cost, which is
unacceptable
====Recovery of impt loss is only 20,000 Not 50,000

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Exercise 8 :
On May 31, 2015, Armstrong Company paid $3,400,000 to acquire all of the common stock of Hall
Corporation, which became a division of Armstrong. Hall reported the following statement of financial
position at the time of the acquisition:
Non-current assets $2,700,000 Equity $2,500,000
Current assets 900,000 Non-current liabilities 500,000
Current liabilities 600,000
Total assets $3,600,000 Total equity and liabilities $3,600,000
It was determined at the date of the purchase that the fair value of the identifiable net assets of Hall
was $2,800,000. At December 31, 2015, Hall reports the following statement of financial position
Current assets $ 800,000
Non-current assets (including goodwill recognized in purchase) 2,400,000
Current liabilities (700,000)
Non-current liabilities (500,000)
Net assets $2,000,000
It is determined that the recoverable amount value of the Hall division is $1,800,000.
Instructions
(a)Compute the amount of goodwill recognized, if any, on May31,2015.
(b)Determine the impairment loss, if any, to be recorded on December 31,2015.
(c)Assume that the recoverable amount of the Hall division is $2,100,000 instead of $1,800,000.
Preparethejournalentrytorecordtheimpairmentloss,ifany,onDecember31,2015.
solution
(a) May 31, 2015:
1-Net assets (fair value) = $2,800,000 (Given)
2- Goodwill = Purchase price 3,400,000 – Net assets (fair value)2,800,000 =$600,000
b) December 31, 2015:
Carrying amount (Net assets at BV) = $2,000,000 Recoverable amount (RA) = $1,800,000
(CA (Net assets at BV) (2,000,000) > Recoverable amount (1,800,000
Loss on impairment = 1,800,000 – 2,000,000 = -$200,000
Loss on impairment 2,000,000
Good will 2,000,000
C)recoverable amount2,100,000 > carrying amount 2,000,000 There is no impairment loss
Exercise 9 :
E12-15Presented below is net asset information related to the Ting Division of Santana, Inc.
Property, plant, and equipment (net) $ 2,600,000
Goodwill 200,000
Accounts receivable 200,000
Cash 60,000
Less: Notes payable (2,700,000)
Net assets $ 360,000
Management estimated its future net cash flows from the division for $335,000. All identifiable assets’ and
liabilities ’book and fair value amounts are the same.
Instructions
(a)Prepare the journal entry (ifany) to record the impairment at December 31,2015.
(b)At December 31,2016, it is estimated that the division’s RA increased to $345,000. Prepare the journal
entry (ifany) to record this increase .
solution
Division’s RA 335,000 < Division’s CV 360,000 So : Impairment Loss = 25,000
(a) Entry to record GW impt
Loss on impairment 25,000
Good will 25,000
Goodwill = 200,000 –25,000 = 175,000
(b)No entry necessary .After agoodwill impairment loss is recognized, the adjusted carrying amount of the good will is
its new accounting basis. Subsequent reversal of previously recognized goodwill impairment losses is NOT permitted
under IFRS.

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Exercise 10 :
On may,31,2011 armstrong company paid $3,500,000 cash to acquire all of the common stock of hall
corporation. Hall reported the following balancesheet at the time of acquisition:
Current asset 900,000 Current liab 600,000
Noncurrent asset 2,700,000 Long term liab 500,000
Total asset Stockholder equity 2,500,000
3,600,000 Total L,and stock holder equity 3,600,000
It was determine at the date of the purchase that the fair value of the identifiable net assets of hall was $ 2,800,000
At December 31,2010, hall reports the following balance sheet information:
Current assets 800,000
Non current assets (including G.W recognized in purchase) 2,400,000
Current liab (700,000)
Long term liab (500,000)
Net assets 2,000,000
It is determined that the fair market value of the hall division is $ 2,100,000
1-compute the amount of GW recognized if any , on may 31,2011.
a)$280,000 b) $350,000 c)$700,000 d)$520,000
Solution
a-goodwill=fair value of the division – the fair value of identifiable assets.
3,500,000-2,800,000=700,000
Exercise 11 :
On August 1, 2017, Li Inc. purchased a license with a cost of $10,530,000 and a useful life of 10 years.
At December 31, 2019, when the carrying value of the asset was 7,985,250, the company determined
that impairment indicators were present. The fair value less costs to sell the license was estimated to
be $7,386,400. The asset's value - in-use is estimated to be $7,605,000. Li's 2019 income statement
will report Loss on Impairment of
a. $218,600.
b. $380,250. Impairment Loss = Recoverable amount 7,605,000 – Carrying value $7,985,250 = -380,250
c. $598,850.
d. $2,545,000.

Exercise 12 :
On January 2, 2018, Ace Inc. purchased a patent with a cost $2,820,000, and a useful life of 4 years. At
December 31, 2018, and December 31, 2019, the company determines that impairment indicators are present.
The following information is available for impairment testing at each year end:
12/31/2018 12/31/2019
Fair value less cost to sell 2,145,000 1,260,000
Value-in-use 2,250,000 1,335,000
No changes were made in the asset's estimated useful life.
1. The company's 2019 income statement will report
a. Amortization Expense of $705,000.
b. Amortization Expense of $705,000 and Loss on Impairment of $30,000.
c. Amortization Expense of $705,000 and a Recovery of Impairment of $135,000.
d. Loss on impairment of $570,000.

2. The company's 2019 income statement will report

a. Amortization Expense of $705,000.
b. Amortization Expense of $750,000 and Loss on Impairment of $165,000.
c. Amortization Expense of $705,000 and a Loss of Impairment of $75,000.
d. Loss on impairment of $210,000.

Exercise 13:
Harrel Company acquired a patent on an oil extraction technique on January 1, 2018 for
€6,000,000. It was expected to have a 10 year life and no residual value. Harrel uses straight-line amortization
for patents. On December 31, 2019, the recoverable amount of the patent was estimated to be €5,400,000. At
what amount should the patent be carried on the December 31, 2019 statement of financial position?
a. €6,000,000 b. €5,400,000 c. €4,800,000 d. €3,360,000

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True & False questions:
1-intangible development cost and restoration cost are part of depletion base
2-intangible assets derive their value from the right (claim) to receive cash in the future .
3-all research and development costs are expected as incurred.
4-research costs are capitalized as an intangible assets once the project has economic viability .
5-amortization of limited life intangible assets should not be impacted by expected residual value.
6-the cost of acquiring a customer list from another company is recorded as an intangible asset.
7-the cost of purchased patent should be amortized over the remaining life of the patent.
8-if anew patent is acquired through modification of an existing patent . the remaining book value of the
original Patent may be amortized over the life of the new patent.
9-research and development costs are recorded as an intangible assets if it is felt they will provide economic
benefits in future years.
10-Companies are required to assess the estimated useful life and salvage value of intangible assets at least
annually.
11-Some intangible assets are not required to be amortized every year.
12- In a business combination, a company assigns the cost, where possible, to the identifiable
tangible and intangible assets, with the remainder recorded as goodwill.
13-Goodwill is considered a master valuation account because it measures the value of specifically
identifiable intangible assets.
14-Internally generated goodwill should not be capitalized in the accounts.
15-Internally generated goodwill associated with a business may be recorded as an asset when a firm offer
to purchase that business unit has been received.
16-All intangibles are subject to periodic consideration of impairment with corresponding potential write-
downs.
17-Periodic alterations to existing products are an example of research and development costs.
18-Research and development costs that result in patents may be capitalized to the extent of the fair value of
the patent.
19- Research and development costs are recorded as an intangible asset if it is felt they will provide
economic benefits in future years.
20- Contra accounts must be reported for intangible assets in a manner similar to the reporting of property,
plant, and equipment.
21-limited life intangible are amortized by systematic charges to expense over their useful life."
22. Accounting for impairments for limited-life intangible assets follows the same rules used to account for
impairments of plant and equipment.
23. Research and development costs that result in patents may be capitalized to the extent of the fair value of
the patent.
24. After an impairment loss is recorded for goodwill, the recoverable amount becomes the basis for the
impaired asset and is used to calculate amortization in future periods.
25. After an impairment loss is recorded for a limited-life intangible asset, the recoverable amount becomes
the basis for the impaired asset and is used to calculate amortization in future periods.
26. A recovery of impairment for an intangible long-lived asset is limited to the carrying value
that would have been reported had the impairment not occurred.
27. All intangibles are subject to periodic consideration of impairment with corresponding
potential write-downs.
28. If the recoverable amount of an indefinite-life intangible other than goodwill is less than its
carrying value, an impairment loss must be recognized.
29. A cash-generating unit is the smallest identifiable group of assets in a business that can generate cash
flow independently of the cash flows from the business’s other assets.
30. The impairment test for goodwill is conducted based on the cash-generating unit to which the goodwill
has been assigned.
31. Recoveries of impairments for intangible long-lived assets are reported in "other income and expense"
on the income statement.
1-T 2-F 3-F 4-F 5-F 6-T 7-F 8-F 9-F 10-T
11-T 12-T 13-F 14-T 15-F 16-T 17-F 18-F 19-F 20-F
21-T 22-T 23-F 24-F 25-T 26-T 27-T 28-T 29-T 30-T 31-T

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Theoretical MCQ:
1. Which of the following does not describe intangible assets?
a. They lack physical existence. b. They are monetary assets.
c. They provide long-term benefits. d. They are classified as long-term assets.
2. Which of the following characteristics do intangible assets possess?
a. Physical existence. b. Claim to a specific amount of cash in the future.
c. Long-lived. d. Held for resale.
3. Which characteristic is not possessed by intangible assets?
a. Physical existence. b. Identifiable.
c. Result in future benefits. d. Expensed over current and/or future years.
4. Costs incurred internally to create intangibles are
a. capitalized. b. capitalized if they have an indefinite life.
c. expensed as incurred. d. expensed only if they have a limited life.
5. Copyrights should be amortized over
a. their legal life. b. the life of the creator
c. twenty years. d. their useful life or legal life, whichever is shorter.
6. Limited-life intangibles are reported at their
a. replacement cost. b. carrying amount unless impaired.
c. acquisition cost. d. liquidation value.
7. Which of the following methods of amortization is normally used for intangible assets?
a. Sum-of-the-years'-digits b. Straight-line
c. Units of production d. Double-declining-balance
8. Factors considered in determining an intangible asset’s useful life include all of the following except:
a. the expected use of the asset.
b. any legal or contractual provisions that may limit the useful life.
c. any provisions for renewal or extension of the asset’s legal life.
d. the amortization method used.

9. Which intangible assets are amortized?

Limited-Life Indefinite-Life
a. Yes Yes
b. Yes No
c. No Yes
d. No No
10. Wriglee, Inc. went to court this year and successfully defended its patent from infringement by a
competitor. The cost of this defense should be charged to
a. patents and amortized over the legal life of the patent.
b. legal fees and amortized over 5 years or less.
c. expenses of the period.
d. patents and amortized over the remaining useful life of the patent.
11. Which of the following is not an intangible asset?
a. Trade name b. Research and development costs c. Franchise d. Copyrights.
12. Which of the following intangible assets should not be amortized?
a. Copyrights b. Customer lists c. Perpetual franchises d. All of the above
13. When a patent is amortized, the credit is usually made to
a. the Patents account. b. an Accumulated Amortization account.
c. an Accumulated Depreciation account. d. A&B
14. When a company develops a trademark the costs directly related to securing it should generally be
capitalized. Which of the following costs associated with a trademark would not be allowed to be capitalized?
a. Attorney fees. b. Consulting fees. c. Research and development fees. d. Design costs.
15. In a business combination, the excess of the cost of the purchase over the fair value of the identifiable net
assets purchased is
a. other assets. b. indirect costs. c. goodwill. d. a bargain purchase.

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16. Goodwill may be recorded when
a. it is identified within a company. b. one company acquires another in a business combination.
c. the fair value of a company’s assets exceeds their cost. d. a company has exceptional customer relations.

17. When a new company is acquired, which of these intangible assets, unrecorded on the acquired company’s
books, might be recorded in addition to goodwill?
a. A trade name. b. A patent. c. A customer list. d. All of the above.

18. Purchased goodwill should

a. be written off as soon as possible against retained earnings.
b. be written off as soon as possible as an other expense item.
c. be written off by systematic charges as a regular operating expense over the period benefited.
d. not be amortized.

19. The intangible asset goodwill may be

a. capitalized only when purchased.
b. capitalized either when purchased or created internally.
c. capitalized only when created internally.
d. written off directly to retained earnings.

20. A loss on impairment of an intangible asset is the difference between the asset’s
a. carrying amount and the expected future net cash flows.
b. carrying amount and its recoverable amount.
c. recoverable amount and the expected future net cash flows.
d. book value and its fair value.

21. Intangible assets are reported on the statement of financial position

a. with an accumulated depreciation account.
b. in the property, plant, and equipment section.
c. as a separate item.
d. None of these choices are correct.

22. A patent should be amortized over

a. twenty years. b. its useful life.
c. its useful life or twenty years, whichever is longer.
d. its useful life or twenty years, whichever is shorter.

23. The major problem of accounting for intangibles is determining

a. fair value. b. separability. c. salvage value. d. useful life.

24. Which of the following costs incurred internally to create an intangible asset is generally expensed?
a. Research phase costs. b. Filing costs. c. Legal costs. d. All of the above.

25.which of the following Legal Fees should be capitalized?

Legal –Fees to Legal Fees to
Obtain a copyright successfully defend a trademark
a. Yes NO
b. Yes No
c. yes Yes
d. No No

26. Which of the following costs of goodwill should be amortized over their estimated useful lives?
Costs of goodwill from a Costs of developing
business combination goodwill internally
a. No No
b. No Yes
c. Yes Yes
d. Yes No
1-b 2-C 3-a 4-C 5-d 6-b 7-b 8-d 9-b 10-d
11-b 12-C 13-d 14-C 15-C 16-b 17-d 18-d 19-a 20-b
21-C 22-d 23-d 24-a 25-C 26.a

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chapter 13(current liabilities &contingencies

1) Note Payable
Exercise1:
Glaus Corp. signed a three –Month , zero – interest bearing $152,205 note on November 1, 2015 for
the purchase of 150,000 of inventory . the adjusting entry made at December 31,2015 will include a
a)debit to note payable for $735
b)debit to interest expense for $1,470. Interest expense = 152,205 – 150,000 = 2,205
Interest expense for dec.2015 = 2,205 x 2/3 = 1,470
C)credit to note payable for $735.
d)credit to interest expense for $1,470. Interest expense(+) 1,470
NP(+) 1,470

Exercise2:
collier borrowed 175,000 on October 1 and is required to pay $180,000 on march 1. What amount is
the note payable recorded at on October 1 and how much interest is recognized from October 1 to
December 31??
a)175,000 and 10$ The note payable will recorded with present value which is = 175,000
b)175,000 and 3,000$  Interest expense = (180,000 – 175,000) = 5,000
 Interest expense /month = $5,000 /5 = 1,000/month
c)180,000 and $3,500  Interest expense from October to December = 1,000 x 3 = 3,000
d)175,000 and $5,000

Exercise3:
Sodium Inc. borrowed $175,000 on April 1, 2018. The note requires interest at 12% and principal to
be paid in one year. The interest that should be recorded at December 31,2018 should be ?

a.15,000 Dec. 31, 2018

b.15,250 Int = 175,000 x 12% x 9/12 = 15,750
c.15,750 The entry
d.15,900 Interest expense 15,750
Interest Payable 15,750

Exercise4:
On September 30, Yang Company signed a HK$150,000, one-year zero-interest-bearing note at First
Solvent Bank. Yang’s borrowing rate on such obligations is 12% (.89286 present value factor).
Prepare the necessary journal entries to record and settle this note?
a.credit to Notes payable for $133,929
b.credit to interest expense 150,000 Sept. 30
c.debit to cash $168,000 Present Value = 150,000 x 0.89286 = 133,929
d.credit to interest payable $134,000
cash 133,929
Note Payable 133,929

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Exercise 5 :
Transaction of Larson company for 2015:
May 1: the company purchased goods fom fry company for 50,000 . terms 2/10,n30 . purchases and
accounts payable are recorded at net amounts . the invoice was paid on May 8.
June 1 : the company purchased equipment for 60,000 from Raney company . Paying $20,000 in Cash and
giving a one year ,9% note for the balance.
Sep.30 : the company borrowed $108,000 by signing a one year Zero interest bearing note $120,000 note
from first state bank.
Required:
(a) Prepare journal entries for the selected transactions above.
(b) Prepare adjusting entries at December 31.
(c):total net liability to be reported on the December 31 will be :
A.153,100 b.111,000 c.42,100 d.155,000

solution
1/5/, 2015
Purchases 49,000
49,000
Accounts Payable 50,000 x 98%
8/5/2015
AP(-) 49,000
49,000
Cash(-)
1/6/2015
Equipment 60,000
Cash 20,000
NP # 1 (60,00 -20,000) note #1 40,000
30/9/2015
Cash 108,000
108,000
NP#2(Note #2)

2)Then ( adjusting entries at Dec.31)

Note 1: ‫ﻓﻮاﺋﺪ اﻟﻜﻤﺒﯿﺎﻟﮫ اﻻوﻟﻲ‬
Interest expense 2,100
2,100
Interest Payable 40,000 x 9%x 7/12

Note 2:‫ﻓواﺋد اﻟﻛﻣﺑﯾﺎﻟﮫ اﻟﺛﺎﻧﯾﮫ‬

Interest expense 3,000
3,000
Notes Payable 120,000 – 108,000 ) x 3/12

(c) 1. Notes payable $40,000

Interest payable 2,100
Total Note 1 42,100

2. Notes payable Note 2 ($108,000 + $3,000) $111,000

total Net liabilities = 42,100 + 111,000 = 153,100

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Exercise 6:
The following are selected 2015 transactions of Darby Corporation.
Sept. 1 - Purchased inventory from Orion Company on account for $50,000. Darby records purchases gross
and uses a periodic inventory system.
Oct. 1 - Issued a $50,000, 12-month, 8% note to Orion in payment of account.
Oct. 1 - Borrowed $75,000 from the Shore Bank by signing a 12-month, zero-interest-bearing $81,000 note.
Required:
(a) Prepare journal entries for the selected transactions above.
(b) Prepare adjusting entries at December 31.
(c) Compute the total net liability to be reported on the December 31 statement of financial position for:(1)
The interest-bearing note. (2) The zero-interest-bearing note.
(d) Prepare journal entries to pay the notes at maturity dates.
solution
(a) September 1, 2015
1/9/2015 Purchases(+) 50,000
50,000
Accounts Payable(+)
October 1, 2015(from AP to NP):
1/10/2015 AP(-) 50,000
50,000
NP(+)

1/10/2015 Cash 75,000

75,000
NP

Note 1: interest bearing note Note 2: Zero – interest

(b) December 31, 2015 (b) December 31, 2015
50,000 x 8%x3/12 6,000 x3/12

Interest expense 1,000 Interest expense 1,500

Interest Payable 1,000 Notes Payable 1,500
C)the effect on balance sheet: C)the effect on balance sheet:
1.Notes payable(1) $50,000 2. Notes payable (2)
Interest payable 1,000 ($75,000 + $1,500) $76,500
$51,000
October 1, 2016: October 1, 2016:
Interest expense =(50,000x8%x9/12)=3,000 Interest expense =(500x 9 )=4,500

Interest expense 4,500

4,500
Note payable 50,000 Notes Payable
1,000
Interest payable .
3,000
Interest expense 81,000
54,000 Notes payable
Cash 81,000
Cash

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Exercise 7 :
Described below are certain transaction of Edwardson corporation for 2012 the company uses the periodic
inventory system .
February 2: the corp. purchased goods from martin company for $ 70,000 subject to cash discount terms of
2/10 , n /30 . purchases and accounts payable are recorded by corporation at net amount after cash discounts.

APRIL 3 : The corp. bought a truck for $ 50,000 from general motors company , paying $ 4,000 cash and signing
a one year. 12% note for the balance of purchase price.

May 1: the corporation borrowed $83,000 from Chicago national bank by signing a $92,000 zero interest
bearing note due one year from may 1.

1-what is the amount of interest Payable at December 31-2012

a-$6,000 b-$4,140 c-$5,400 d-$6,300

2-What is the amount of total net Liabilities of edwardson company at the end of the the year
a-$667,000 b-$207,740 c-$509,400 d-$223,300

Solution
(1)
Feb 2 Purchases 68,600
AP(70,000*98%) 68,600

April 3 Truck 50,000

Cash 4,000
NP(50,000-4,000)(Note #1) 46,000

May 1 Cash 83,000

NP (note #2) 83,000

(2):
interest expense for Note #1 (april 1 to dec .31) = 46,000*12%*9/12 = $ 4,140
Dec 31 Interest exp 4,140
Interest payable 4,140

Interest expense for note # 2 (may 1 to dec. 31) = 9,000*8/12 = $6,000

Dec 31 Interest exp 6,000
NP 6,000
(3):

Balance sheet
Accounts payable 68,600
NOTE payable #1 46,000
Interest payable 4,140 50,140
Note payable #2 83,000 + 6,000 = 89,000 89,000

TOTAL NET LIABILITIES $207,740

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2) Warranty Provisions

Exercise 1:
Warranty 4U sold extended service contracts on electronic equipment sold through major retailers. The
standard contract is for three years. During the current year warranty 4u provided 21,000 such warranty
contracts at an average price of $81 each. Related to these contracts , the company spent $200,000 servicing
the contracts during the current year and expects to spend $1,050,000 more in the future .

1)what is the net profit that the company will recognize in the current year related to these contracts ?
a.$451,000 b.$1,501,000 c.$150,333 d.$367,000
solution
sale of warranty contracts:
Date Cash 1,701,000
Unearned warranty revenue 1,701,000
Actual warranty cost:
Date Warranty expense 200,000
Cash , inventory ,wages payable 200,000
The un earned revenue will be earned revenue
So earned revenue = 1,701,000 / 3 = 567,000
earned ‫ ھﯿﺘﺤﻮل اﻟﻲ‬unearned ‫ﻓﻲ اﻟﺤﺎﻟﮫ دي ال‬
Date Unearned warranty revenue 567,000
Warranty revenue 567,000
So net profit = revenue 567,000 – expenses 200,000 = 367,000

Exercise 2:
Hatcher corporation sold 10,500 dishwashers for $1,100 each during 2019. The dishwashers are
under warranty for one year following the sale. Maintenance on the dishwashers during the
warranty period average $90 each. Actual warranty costs incurred during 2019 for units sold that
year were $296,000 , the statement of financial position at year end will report related liability of
a.$649,000
b.$296,000 Estimated warranty liab = 10,500 u x $90 = 945,000
c.350,000 But actual warranty paid = $296,000
d.468,000 Warranty liability from previous year 0
+warranty liability for current year 945,000
So total warranty liability 945,000
Actual warran . paid (296,000)
649,000

Exercise 3:
Electronics 4U manufactures high-end whole home electronic systems . the company provides a one year
warranty for all products sold . the company estimates that the warranty cost is $200 per unit sold and
reported a liability for estimated warranty costs $6.5 milion at the beginning of this year. If during the
current year , the company sold 50,000 units for a total of 243,000 million and paid warranty claims of
7,500,000 on current and prior year sales , what amount of liability would the company report on its
statement of financial position at the end of the current year ?
a.2,500,000
b.3,500,000 Warranty liability from previous year 6,500,000
c.9,000,000 +warranty liability for current year (50,000 x $2 00) 10,000,000
d.10,000,000 So total warranty liability 16,500,000
(7,500,000)
9,000,000

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Exercise 4:
Holland Company estimates its annual warranty expense as 3% of annual net sales. The following
data relate to the calendar year 2018:
Net sales $1,500,000
Warranty liability account
Balance, Dec. 31, 2018 $10,000 debit before adjustment
Balance, Dec. 31, 2018 $20,000 credit after adjustment
Which one of the following entries was made to record the 2018 estimated warranty expense?
a. Warranty Expense 45,000
Retained Earnings (prior-period adjustment) 7,500
Warranty Liability 37,500
b. Warranty Expense 25,000
Retained Earnings (prior-period adjustment) 5,000
Warranty Liability 45,000
c. Warranty Expense 30,000
Warranty Liability 30,000
d. Warranty Expense 45,000
Warranty Liability 45,000
Sales = $1,500,000

Cash 1,500,000
Sales 1,500,000
Estimated warranty cost = sales $1,500,000 x 3% = $45,000

Warranty expense 45,000

Warranty Liability 45,000

Exercise 5:
Anna Company sold 500 Television Sets during 2018 at $5,000 each. During 2018, The Company
spent $20,000 servicing the 2-year service type warranties that a ccompany the TV sets. Assume that
of the sales total of the TVs ,$150,000 relates to sales of warranty contracts. The company estimates
the total cost of servicing the warranties will be $100,000 for 2 years. If the company records
revenue on the service-type warranty on a straight-line basis. What amounts should be recorded
respectively as sales revenue and warranty revenue included in 2018 entries?
a.$2,120,000 and $150000. b.$2,500,000 and $150,000.
c.$2,350,000 and $75000 d.$2,450,000 and $100,000.
Solution
Year 2018
1.Record the sale of product and related warranty liability:
‫ ﻣرﻛب‬entry ‫ ﺿﻣﺎن اﺿﺎﻓﻲ ﻛﻣﺎن ھﻧﻌﻣل‬150,000 ‫ ﺑداﺧل ھذا اﻟﻣﺑﻠﻎ ﻓﯾﮫ‬2,500,000 ‫ﺧﻠﻲ ﺑﺎﻟك ھﻧﺎ اﺣﻧﺎ ﺑﯾﻌﻧﺎ اﻟﻣﻧﺗﺟﺎت ب‬
Cash 500u x $5000 2,500,000
Unearned revenue 150,000
Sales revenue 2,350,000
2.Record Estimated Warranty costs for the units sold
Warranty expense 100,000
Warranty liab 100,000
3.Record actual warranty costs:
Warranty liab 20,000
Cash,inventory, 20,000
4.Recording revenue warranties recognized in 2018 :
Earned revenue = 150,000 / 2 = 75,000

Unearned warranty revenue 75,000

Warranty revenue 75,000

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exercise 6 : E13-12
Winslow company sold 150 color ,laser copiers in 2015 for $4,000 apiece , together with a one year
assurance – type warranty . maintenance on each copier during the warranty period averages $300 .
Instructions:
 Prepare entries to record the sale of the copiers and the related warranty costs
 Actual warranty costs incurred in 2015 were $17,000.
What is the balance of liabilities at the end of 2015 ?
a-17,000 b- 45,000 c-23,000 d-28,000
Solution

Year 2015:
Record the sale of product and related warranty liability:

1st : Record the sale of product and related warranty liability:

Cash(150*4,000) 600,000
Sales rev 600,000

Warranty expense(150*300) 45,000

Warranty liab 45,000

Record actual warranty costs:

Warranty liab 17,000

Cash,inventory 17,000

Exercise 7 :
Streep factory provides a 2 year warranty with one of its products which was first sold in 2015 for
$4,000,000 . Streep estimates that $450,000 will be spent in the future to service warranty claims related to
the 2015 sales.
In 2015 streep spent $130,000 servicing warranty claims

Required:
A)prepare the journal enries to record the sale ,warranty cost during 2015
b)what balance under current liabilities in 2015 statement of financial position.
a-231,000 b- 555,000 c-230,000 d-320,000
solution
Record the sale of product and related warranty liability:
Cash 4,000,000
Warranty expense 450,000
Warranty liab 450,000
Sales rev 4,000 ,000
Record actual warranty costs: 130,000

Warranty liab 130,000

Cash,inventory,wages payable 130,000
B0statement of financial position will show:
Warranty liability = 320,000 =(450,000 -130,000)

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exercise 8:
Samsung co. sold 100 units of a product during December 2017. The selling price was $ 500 each received in
cash. The company provides 1 year warranty on its products. From past experience, the co. estimates that
the warranty costs will be $20 per unit in average. The company incurred actual warranty costs related to
these sales of $400 during 2017 and $1600 during 2018.
Required: Prepare the necessary journal entries in 2017 and 2018

solution
Year 2017
1.Record the sale of product and related warranty liability:
Cash 100u x $500 50,000
Sales revenue 50,000
2.Record Estimated Warranty costs for the units sold
Warranty expense 100 u x $20 2,000
Warranty liab 2,000
3.Record actual warranty costs:
Warranty liab 400
Cash,inventory, 400
By the end of 2017, the Warranty Liability
account will have a credit balance of 2000 – 400 = 1,600 to be reported as a Current Liability in
thecompany’s Balance Sheet in December 31, 2017
Year 2018:
Record actual warranty costs:
Warranty liab 1,600
Cash,inventory 1,600

Exercise 9 :
Alvardo company sells a machine for $7,400 under a 12 month warranty agreement that requires the
company to replace all defective parts and to provide the repair labor at no cost to the customers. With sales
being made evenly throughout the year,the company sells 600 machines in 2014 (warranty costs are
incurred half in 2014 and half in 2015 ) as a result of product testing , the company estimates that the
warranty cost 390 per machine (170 parts and 220 labor)
Required:
a)assuming that the actual warranty costs are incurred exactly as estimated, what journal entries would be
made in 2014 and 2015 ?
b)what amount , if any , is disclosed in the statement of financial position as aliability for warranty costs as of
December 31,2014?
solution
2014
Record the sale of product and related warranty liability:
Cash 600 x 7,400 4,400,000
Warranty expense 600 x 390 234,000
Warranty liab 234,000
Sales rev 4,400 ,000
Record actual warranty costs:234,000 x 1/2

Warranty liab 117,000

Cash, inventory ,wages payable 117,000
2015

Record actual warranty costs:234,000 x 1/2 = 117,000

Warranty liab 117,000

Cash, inventory ,wages payable 117,000
b)statement of financial position 2014 : warranty liab = 117,000 ( 234,000 -117,000)

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Exercise 10:
In 2017, Pollard Corporation began selling a new line of products that carry a two-year warranty against defects.
Based upon past experience with other products, the estimated warranty costs related to dollar sales are as follows:
First year of warranty 2%
Second year of warranty 5%
Sales and actual warranty expenditures for 2017 and 2018 are presented below:
2017 2018
Sales $300,000 $400,000
Actual warranty expenditures
lOMoARcPSD| 6630178
10,000 20,000
What is the estimated warranty liability at the end of 2018?
a. $19,000. b. $20,000. c. $28,000. d. $47,000.
solution

Year 2017
1.Record the sale of product and related warranty liability:
Cash 300,000
Sales revenue 300,000
2.Record Estimated Warranty costs for the units sold:
7% ‫ﯾﻌﻧﻲ ﺿﻣﺎن ﺳﻧﺗﯾن‬5% ‫ واﻟﺳﻧﮫ اﻟﺛﺎﻧﯾﮫ‬2% ‫ﺧﻠﻲ ﺑﺎﻟك اﻟﺿﻣﺎن ﻋﻠﻲ اﻟﻣﻧﺗﺞ ده ﺳﻧﺗﯾن اﻟﺳﻧﮫ اﻻوﻟﻲ‬

Warranty expense 300,000 x 7% 21,000

Warranty liab 21,000
3.Record actual warranty costs:
Warranty liab 10,000
Cash,inventory, 10,000
the end of 2017 Warranty Liability account will have a credit balance 21,000 – 10,000 = 11,000
Year 2018
1.Record the sale of product and related warranty liability:
Cash 400,000
Sales revenue 400,000
2.Record Estimated Warranty costs for the units sold:
Warranty expense 400,000 x 7% 28,000
Warranty liab 28,000
3.Record actual warranty costs:
Warranty liab 20,000
Cash,inventory, 20,000
By the end of 2018, the Warranty Liability account will have a credit balance of 11,000 balance from end
2017 +28,000 – 20,000 = 19,000

Exercise 11 :
Miley equipment company sells computers for $1,500 each and also gives each customer a 2-year warranty
that requires the company to perform periodic services and to replace defective parts.
**During 2014 the company sold 700 computers. Based on past experience . the company has estimated the
total 2-year warranty costs as $30 for parts and $60 for labor (Assume sales all occur at December 31,2014)
**In 2015, miley incurred actual warranty costs relative to 2014 computer sales of $10,000 for parts and $
18,000 for labor.
Instructions:
Under an assurance –type warranty ,prepare the entries to reflect the above transactions for 2014 and 2015.

Solution

Year 2014:

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Record the sale of product and related warranty liability:

Cash(700*1,500) 1,050,000
Warranty expense(700*90) 63,000
Warranty liab 63,000
Sales rev 1,050,000
Year 2015:
Record actual warranty costs: $10,000+$18,000)
Warranty liab 28,000
Cash,inventory 28,000

Exercise 12 :
Denson machinery company began production of a new machine in july 2015 and sells 100 of these
machines for 5,000 cash by year- end each machine is under warranty for one year.
Denson estimates based on past experience with similar machines,that the warranty cost will average $200
per unit. Further as a result of parts replacements and services performed in compliance with machinery
warranties, it incurs $4000 in warranty costs in 2015 and 16,000 in 2016.
Required: Prepare the required journal entries for the sale and the related warranty costs for 2015 and
2016?
Solution

Year 2015:
1st : Record the sale of product and related warranty liability:

Cash 5,000 x100 500,000

Sales rev 500,000

Warranty expense 100 x200 20,000

Warranty liab 20,000
Or (1 entry only):

Cash 5,000 x100 500,000

Warranty expense 100 x200 20,000
Warranty liab 20,000
Sales rev 500,000
Record actual warranty costs:

Warranty liab 4000

Cash,inventory, 4000
Dec 31,2015 , statement of financial position will report warranty liability as a current liability of $16,000
(20,000 – 4,000)

2015 , income statement will report warranty expense of $20,000

Year 2016:

Record actual warranty costs:

Warranty liab 16,000
Cash,inventory , accrued Payroll 16,000
Dec 31,2016 statement of financial position will report warranty liability as a current liability of $ 0

statement of financial position will report warranty liability as a current liability of $ 0

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Exercise 13:
During 2016, Salton Co. introduced a new line of machines that carry a three-year warranty against
manufacturer’s defects. Based on industry experience, warranty costs are estimated at 1% of sales in the
year of sale, 2% in the year after sale, and 3% in the second year after sale. Sales and actual warranty
expenditures for the first three-year period were as follows:
Sales Actual Warranty Expenditures
2016 $ 1,400,000 $ 26,000
2017 1,000,000 40,000
2018 1,400,000 90,000
total $3,800,000 $156,000
What amount should Salton report as a liability at December 31, 2018?
a. $0 b. $14,000 c. $34,000 d. $72,000
solution
Year 2016
1.Record the sale of product and related warranty liability:

Cash 1,400,000
Sales revenue 1,400,000
2.Record Estimated Warranty costs for the units sold:
6% ‫ ﺳﻧﯾن‬3 ‫ ﺑﻛده ﺿﻣﺎن‬%3 ‫ واﻟﺛﺎﺛﮫ‬,2% ‫ واﻟﺳﻧﮫ اﻟﺛﺎﻧﯾﮫ‬1% ‫ ﺳﻧﯾن اﻟﺳﻧﮫ اﻻوﻟﻲ‬3 ‫ﺧﻠﻲ ﺑﺎﻟك اﻟﺿﻣﺎن ﻋﻠﻲ اﻟﻣﻧﺗﺞ ده‬

Warranty expense 1,400,000 x 6% 84,000

Warranty liab 84,000
3.Record actual warranty costs:

Warranty liab 26,000

Cash,inventory, 26,000
the end of 2017, the Warranty Liability account will have a credit balance of 84,000 – 26,000 = 58,000
Year 2017
1.Record the sale of product and related warranty liability:
Cash 1,000,000
Sales revenue 1,000,000

2.Record Estimated Warranty costs for the units sold:

Warranty expense 1,000,000 x 6% 60,000
Warranty liab 60,000
3.Record actual warranty costs:

Warranty liab 40,000

Cash,inventory, 40,000
By the end of 2017, the Warranty Liability account will have a credit balance of
58,000 balance from end 2016 +60,000 – 40,000 = 78,000
Year 2018
1.Record the sale of product and related warranty liability:
Cash 1,400,000
Sales revenue 1,400,000
2.Record Estimated Warranty costs for the units sold:
Warranty expense 1,400,000 x 6% 84,000
Warranty liab 84,000
3.Record actual warranty costs:
Warranty liab 90,000
Cash,inventory, 90,000
By the end of 2018, the Warranty Liability account will have a credit balance of 78,000
balance from end 2017 +84,000 – 90,000 = 72,000

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Exercise 14 : E13-13
Selzer Equipment Company sold 500 Rollomatics during 2015 at $6,000 each.
During 2015, Selzer spent $30,000 servicing the 2-year assurance-type warranties that accompany
the Rollomatic.
Required:
(a) Prepare 2015 entries for Selzer assuming that Selzer estimates the total cost of servicing the warranties
will be $120,000 for 2 years.

(b) Prepare 2015 entries for Selzer assuming that the warranties are service-type warranties and are not
considered part of the sale of the Rollomatics. Assume that of the sales total of the Rollomatics, $160,000
relates to sales of warranty contracts. Selzer estimates the total cost of servicing the warranties will be
$120,000 for 2 years. Prepare 2015 entries related to the service type warranties. If the company records
revenue on the service-type warranty on a straight-line basis.
Solution:
During 2015
1)assurance type warranty
Cash(500*$6,000) 3,000,000
Warranty expense 120,000
Warranty liab 120,000
Sales rev 3,000,000
Record actual warranty costs:

Warranty liab 30,000

Cash, inventory, wages payable 30,000
2)service type warranty

Cash 3,000,000
Sales revenue 2,840,000
Unearned warranty revenue 160,000

Warranty expense 30,000

Cash, inventory, wages payable 30,000

Adjusting entry to record Warranty revenue: Using SLM

Warranty revenue = total unearned warranty revenue 160,000 / 2No . of years

Unearned warranty revenue 80,000

Warranty revenue 80,000

1) Dividends Payable :

Amount owed by a corporation to its stockholders as a result of board of directors’ authorization.

 Generally paid within three months.
 Undeclared dividends on cumulative preference shares not recognized as a liability.
 Dividends payable in the form of additional shares are reported in equity.
‫ و ﻟﻣﺎ ﺑﺗوزع اﻟﻔﻠوس ﻋﻠﻲ اﻟﻣﺳﺎھﻣﯾن‬Dividends Payable ‫اﻟﺷرﻛﺎت اﻟﻣﺳﺎھﻣﮫ ﻟو اﻋﻠﻧت ﻋن ﺗوزﯾﻊ ارﺑﺎح ھﻲ ﻛده ﻣﻠﺗزﻣﮫ و ﻋﻠﯾﮭﺎ اﻟﺗزام اﺳﻣﮫ‬
Cash (-) ‫اﻻﻻﺗزام اﻟﻠﻲ ﻋﻠﯾﻧﺎ ﺑﯾﻘل و ﺑﻧدﻓﻊ ﻓﻠوس ﻟﻠﻣﺳﺎھﻣﯾن ﻓﺎل‬

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Exercise 15:
On August 1, the board of directors declared a $300,000 cash dividend that was payable on
September 10 to shareholders.
‫ﻋﻠﯾﻧﺎ اﻟﺗزام ﺑﺗوزﯾﻊ اﻻرﺑﺎح‬
Solution
Dividends Payable:
At date of declaration (Aug.1):
Retained earnings(-) 300,000
Dividends Payable(+) 300,000
At date of payment (Sep.10):

Dividends Payable(-) 300,000

Cash (-) 300,000

2) Unearned revenue :
Payment received before providing goods or performing service
‫ وھو ﺗﻘدﯾم اﻟﺧدﻣﮫ‬unearned revenue ‫ھﻧﺎ ﺷرﻛﺗﻧﺎ اﺳﺗﻠﻣت ﻓﻠوس ﻗﺑل ﺗﻘدﯾم اﻟﺧدﻣﮫ ﺑﻛده اﺣﻧﺎ ﻋﻠﯾﻧﺎ اﻟﺗزام‬

Exercise 16 :
Sports Pro Magazine sold 12,000 annual subscriptions on August 1,2015 for $18 each. Prepare Sports
Pro’s August 1, 2015, journal entry and the December 31, 2015, annual adjusting entry
.
Solution
(1) To record Unearned Revenue (Aug.1.)
Unearned annual subscriptions = 12,000 x $18 = 216,000
Cash (+) 216,000
Unearned subscription revenue (+) 216,000
(2) Adjusting entry to record Revenue (Dec. 31):
Subscription Rev. (from Aug.1 to Dec. 31) = 216,000 x 5/12 = 90,000

Unearned subscription revenue (-) 90,000

subscription revenue (+) 90,000

3) Litigation provisions :
Companies must consider the following in determining whether to record a liability with respect to
pending litigation:
1- The time period in which the underlying cause of action occurred. The cause for action should be
dated on or before the date of the financial statements.
2-The probability (greater than 50%) of an unfavorable outcome.
3- Ability to make a reasonable estimate of the amount of loss.

Exercise 17 :
SCO Co. is involved in a lawsuit at December 31, 2015.
(a) Prepare the December 31 entry assuming it is probable that the Co. will be liable for $900,000 as a result
of this suit.
(b) Prepare the December 31 entry, if any, assuming it is not probable that the Co. will be liable for any
payment as a result of this suit.
Solution
A)
Litigation Loss (+) 900,000
Litigation liability (+) 900,000
B) No entry is necessary, because it is not probable that a liability has been incurred at 12/31/15.

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True &False questions
1-warranties that the product meets agreed –upon specifications in the contract at the time the
product is sold are referred to as assurance type warranty.

2-azero interest bearing note payable that is issued at a discount will not result in any interest
expense being recognized.

3-under an assurance type warranty . companies charge warranty costs only to the period in which
they comply with the warranty.

4-a provision differs from other liabilities in that there is greater uncertainty about the timing and
amount of settlement.

5-provisions are only recorded if it is possible that the company will have to settle an obligation at
same point in the future.

6-current liability are usually recorded and reported in financial statements at their full maturity
value.
1-T 2-F 3-F 4-T 5-F 6-T

Multiple choice questions

1-which of the following terms is associated with recognizing a provision
a. Possible but not Probable b. Likely c. Remote. d. Probable.

2-which of the following May be a current Liability

a. withheld income tax b. deposits received from customers
c. unearned revenue d. all of the above.

3-which of the following is the best describes accounting for assurance type warranty cost
a. expensed when Paid b. expensed when warranty claims are certain
c. expensed based on estimate in year of sale d. expensed when incurred.

4-which of the following is an characteristics of an assurance type warranty but not a service type
warranty
a. warranty liability b. warranty expense c. unearned warranty revenue d. warranty revenue.

5-Liabilities are
a. any accounts having credit balances after closing entries are made.
b. deferred credits that are recognized and measured in conformity with generally accepted accounting
principles.
c. obligations to transfer ownership shares to other entities in the future.
d. obligations arising from past transactions and payable in assets or services in thefuture.

6 -Which of the following is a current liability?

a. A long-term debt maturing currently, which is to be paid with cash in a sinking fund
b. A long-term debt maturing currently, which is to be retired with proceeds from a new debt issue
c. A long-term debt maturing currently, which is to be converted into common stock
d. None of these answers are correct.
7 . Among the short-term obligations of Larsen Company as of December 31, the balance
sheet date, are notes payable totaling $250,000 with the Dennison National Bank. These
are 90-day notes, renewable for another 90-day period. These notes should be classified
on the balance sheet of Larsen Company as
a. current liabilities. b. deferred charges. c. long-term liabilities. D.assets
1-d 2.d 3-c 4-A 5-D 6-D 7-A

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chapter 18" revenue recognition"

Exercise 1 :
Use the following information to answer questions 1 - 4:
Arab Contractors Construction Company uses the percentage-of-completion method of accounting. In
2019, the company began to establish a dam at Tanzania, the dam will be ended in October 2020, the
contract price was $2,100,000. Other details are as follows:
2019 2020
Costs incurred during the year $900,000 $500,000
Estimated costs to complete, as of Dec.31 600,000 –0–
Billings during the year 420,000 1,580,000
Collections during the year 350,000 1,400,000
1- Percentage of completion for 2019 and 2020 respectively
A.30% and 60% B.30% and 100% C.70% and 30% D.None of the above

2- Current year Revenue for 2019 and 2020 respectively

A.420,000 and 980,000 B.1,260,000 and 840,000
C.600,000 and 1,400,000 D.420,000 and 1,720,000
3- Gross Profit for 2019 and 2020 respectively
a- 180,000 and (320,000) b- 600,000 and 1,400,000
c- 360,000 and 340,000 d- 14,000,000 and (140,000)

4- When recording the progress of billings {2019 billing} AR will be debited by:
a- 1,580,000 b- 420,000 c- 2,000,000 d- 1,400,000

5- Assuming cost-recovery method of accounting , what portion of the total contract price would be
recognized as gross profit in 2019?
a- 180,000 b- 600,000 c- -0- d- 14,000,000
solution
2019 2020
Cost to date cumulative 900,000 1,400,000
Estimated cost to complete 600,000 0
Total cost 1,500,000 1,400,000
% of completion to date 60% 100%
Contract price 2,100,000 2,100,000
Revenue to date 1,260,000 2,100,000
(-) revenue in the prior year (0) (1,260,000)
Revenue recognized each year 1,260,000 840,000
(-)actual cost incurred during the year (900,000) (500,000)
Gross profit recognized each year 360,000 340,000

1-D 2-B 3-C 4-B 5-C

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Exercise 2 :
On feb 1,2010 ، Kinler contractors agreed to construct a building at a contract price of $12,000,000 . Kinler
estimated total construction costs would be $8,000,000 and the project would be finished in 2012 .
information relating to the costs and billings for this contract is as follows:
2010 2011 2012
Costs incurred current year 3,000,000 2,280,000 3,920,000
Estimated costs to complete 5,000,000 3,520,000 0
Customer billing to date 4,400,000 8,000,000 11,200,000
Collection to date 4,000,000 7,000,000 11,000,000
1) using percentage of completion Determine the amount gross profit 2010,2011 & record the entry
for 2011 what is the amount of gross profit at 2010 , 2011
a.$1,500,000 & 420,000 b. $1,120,000 & 400,000
a.$2,300,000 & 870,000 a.$1,510,000 & 240,000
2)At December 31,2011 Cooper would report construction in progress in the amount
a.$4,000,000 b.2,700,000 c.3,700,000 d.3,280,000
3) the entry to record the current cost of a contract during 2011 will show :
A.debits AR by 2,280,000. B. debits billings on CIP. 2,280,000
C. credits cash, and AP by 2,280,000. D. credits CIP by 2,280,000.
4) the entry to record collections
A. debits AR by 3,000,000 . B. credits cash by 3,000,0000
C. credits billings to CIP by 3,000,000. D. debits cash by 3,000,000
5) the entry to record billings on CIP
A. debits AR 3,600,000. B. debits billings on CIP8,000,000.
C. debits cash3,600,000 . C. credits CIP 4,400,000.
Solution

2010 2011
Cost to date cumulative 3,000,000 5,280,000
Estimated cost to complete 5,000,000 3,520,000
Total cost 8,000,000 8,800,000
% of completion to date 37.5% 60%
Contract price 12,000,000 12,000,000
Revenue to date cumulative 4,500,000 7,200,000
(-) revenue in the prior year (0) (4,500,000)
Revenue recognized each year 4,500,000 2,700,000
(-)actual cost incurred during the year (3,000,000) (2,280,000)
Gross profit recognized each year 1,500,000 420,000
Entries 2011:
1-actual cost during the year:.actual costs (incurred during the year)
CIP 2,280,000
Cash, inventory ,AP 2,280,000
2.Billings issued to customer during the year: (8,000,000 – 4,400,000)
AR 3,600,000
Billing onCIP 3,600,000
3.cash collection from customer during the year: (7,000,000 – 4,000,000)
Cash 3,000,000
AR 3,000,000
4.revenue and gross profit during the year :
CIP (gross profit (3) 420,000
Construction expense (2) 2,280,000
Revenue from contract 2,700,000
CIP balance(2011 ) = 2,280,000 + 420,000 =2,700,000

1-A 2-B 3-C 4-d 5-A

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Exercise 3 :
Horner Construction Co. uses the percentage-of-completion method. In 2012, Horner began work on a
contract for $16,500,000; it was completed in 2013. The following cost data pertain to this contract:
Year Ended December 31
2012 2013
Cost incurred during the year $5,850,000 $4,200,000
Estimated costs to complete at the end of year 3,900,000
1- Percentage of completion for 2012 and 2013 respectively
A.30% and 60% B.60% and 100% C.70% and 30% D.None of the above

2- Current year Revenue for 2012 and 2013 respectively

A.9,900,000 and 6,600,000 B.1,260,000 and 840,000
C.600,000 and 1,400,000 D.420,000 and 1,720,000

3-The amount of gross profit to be recognized on the income statement for the year ended December
31, 2013 is
a. $2,400,000. b. $2,580,000. c. $2,700,000. d. $6,4500,000.
solution
2012 2013
Cost to date cumulative 5,850,000 10,050,000
Estimated cost to complete 3,900,000 0
Total cost 9,750,000 10,050,000
% of completion to date 60% 100%
Contract price 16,500,000 16,500,000
Revenue to date cumulative 9,900,000 16,500,000
(-) revenue in the prior year (0) (9,900,000)
Revenue recognized each year 9,900,000 6,600,000
(-)actual cost incurred during the year (5,850,000) (4,200,000)
Gross profit recognized each year 4,050,000 2,400,000

1-b 2-A 3-A

Exercise 4 :
El wady co. uses the percentage of completion method . during 2007 . the co. entered into a contract to
construct a building for AAA co. the following details pertain to the contract.
2007 2008
% of completion 25% 60%
Estimated total cost 2,250,000 2,500,000
Gross profit recognized to date 187,500 300,000
1)the amount of construction cost incurred during 2008 was
a.1,500,000 b.250,000 c.937,500 d.525,5oo
1)the amount of revenue recognized during 2007 was
a.1,500,000 b.750,000 c.937,500 d.525,5oo

1-% of completion = cost to date / total cost

So cost to date = total cost x % of completion
Cost to date 2007 = 2,250,000 x 25% = 562,500
Cost to date 2008 = 2,500,000 x 60% = 1,500,000
Cost incurred during 2008 = 1,500,000 – 562,500 = 937,500 answer c
2-gross profit 2007 = revenue 2007 – actual cost 2007
Revenue 2007 = gross profit 2007 + actual cost 2007
= 187,500 + 562,500 = 750,000 answer b

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Exercise 5 :
Green Construction Co. has consistently used the percentage-of-completion method of recognizing revenue.
During 2012, Green entered into a fixed-price contract to construct an office building for $16,000,000.
Information relating to the contract is as follows: At December 31
2012 2013
Percentage of completion 15% 45%
Estimated total cost at completion $12,000,000 $12,800,000
Gross profit recognized (cumulative) 800,000 1,920,000
Contract costs incurred during 2013 were
a. $3,840,000.
b. $3,960,000. 1-% of completion = cost to date / total cost
c. $4,200,000. So cost to date = total cost x % of completion
d. $5,760,000. Cost to date 2012 = 12,000,000 x 15% = 1,800,000
Cost to date 2013 = 12,800,000 x 45% = 5,760,000
Cost incurred during 2013 = 5,760,000– 1,800,000 = 3,960,000 answer b

Exercise 6 :
On feb 1,2010 morsy contractors agreed to construct a building at a contract price of $6,000,000 .
morsy estimated total construction costs would be $4,000,000 and the project would be finished in
2012 . information relating to the costs and billings for this contract is as follows:
2010 2011 2012
Costs incurred to date 1,500,000 2,640,000 4,600,000
Estimated costs to complete 2,500,000 1,760,000 0
Customer billing to date 2,200,000 4,000,000 5,600,000
Collection to date 2,000,000 3,500,000 5,500,000
1)the amount of gross Profit at 2012 was
a.1,500,000 b.440,000 c.210,000 d.750,0oo
Solution
2010 2011 2012
Cost to date cumulative 1,500,000 2,640,000 4,600,000
Estimated cost to complete 2,500,000 1,760,000 00
Total cost 4,000,000 4,400,000 4,600,000
% of completion to date 37.5% 60% 100%
Contract price 6,000,000 6,000,000 6,000,000
Revenue to date cumulative 2,250,000 3,600,000 6,000,000
(-) revenue in the prior year (0) (2,250,000) (3,600,000)
Revenue recognized each year 2,250,000 1,350,000 2,400,000
(-)actual cost incurred during the year (1,500,000) (1,140,000) (1,960,000)
Gross profit recognized each year 750,000 210,000 440,000
Entries 2012:
1-actual cost during the year= (4,600,000 – 2,640,000)
CIP 1,960,000
Cash ,material , AP 1,960,000
2-billing to customers: (5,600,000 – 4,000,000)
AR 1,600,000
Billing on CIP 1,600,000
3-cash collected from customers: (55,00,000 – 3,500,000)
cash 2,000,000
AR 2,000,000
4-revenue and gross profit 2012:
CIP 440,000
Construction expenses 1,960,000
Revenue from the contracts 2,400,000
5-closing the project account
Billing on CiP 6000,000
CIP 6000,000

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Exercise 7:
Presented below is the related information to a three years’- price of two millions – construction
contract.( amounts in thousands)
2020 2021 2022
Cost incurred during(through) the year 400,000 1,000,000 500,000
Billings of current year 350,000 700,000 950,000
Collections of the current year 150,000 350,000 600,000
Estimated cost to complete 1,600,000 350,000 0
Choose the correct answer for each of the following statements.
1 – the related percentage of completion to 2020 is
A - %25. B - %30. C - %20. D - %50.
2 – the related percentage of completion to 2021 is
A - %80. B - %30. C - %20. D - %60.
3 – percentage of work done in 2021 is
A - %40. B - %70. C - %60. D - %90.
4 – cost to date Dec.,31. 2021 is
A – 1,500,000. B – 1,400,000. C – 1,600,000. D – 1,950,000.
5 – recognized revenue to date’s balance in Dec.,31. 2021 is
A – 400,000. B – 1,200,000. C – 1,500,000. D – 1,600,000.
6 – the related recognized revenue to 2021 is
A – 1,600,000. B – 400,000. C- 1,200,000. D – 1,500,000.
7 – the related recognized revenue for the year 2022 is
A – 200,000. B – 400,000. C – 150,000. D – 0.
8 – recognized gross profit (loss) of 2020 is
A – 0. B – (150,000). C – 50,000. D – 200,000.
9 – recognized revenues to date (Dec.,31. 2022) are
A – 2,000,000. B – 1,600,000. C – 1,750,000. D – 1,800,000.
10 – the recognized gross profit of 2022 is
A – 100,000 losses. B – 100,000 gains. C – 200,000 gains. D – 200,000 losses.
11 – the entry to record the current cost of a contract
A – debits AR. B – debits billings on CIP. C – credits cash, and AP. D – credits CIP.
12 – the entry to record collections
A – debits AR. B – credits cash. C – credits billings to CIP. D – debits cash.
13 – the entry to record billings on CIP
A – debits AR. B – debits billings on CIP. C – debits cash. D – credits CIP.
14 – the entry to record the contract’s completion
A – debits CIP. B – debits billings on CIP. C – credits AR. D – credits cash.
15 – the recognized gross profit is recorded when using the cost recovery Method
A – when a contract is completed. B – yearly.
C – when a revenue is collected. D – when signing the contract.
1-C 2-A 3-C 4-b 5-d 6-C 7-b 8-A 9-A 10-A
11-C 12-d 13-A 14-b 15-A

Solution
2020 2021 2022
Cost to date cumulative 400,000 1,400,000 1,900,000
Estimated cost to complete 1,600,000 350,000 0
Total cost 2,000,000 1,750,000 1,900,000
% of completion to date 20% 80% 100%
Contract price 2,000,000 2,000,000 2,000,000
Revenue to date cumulative 400,000 1,600,000 2,000,000
(-) revenue in the prior year (0) (400,000) (1,600,000)
Revenue recognized each year 400,000 1,200,000 400,000
(-)actual cost incurred during the year (400,000) (1,000,000) (500,000)
Gross profit recognized each year 0 200,000 -100,000

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Exercise 8:
Cooper construction company had a contract starting April 2015 to construct a $18,000,000 building
that is expected to be completed in September 2017 at an estimated cost (total construction cost) of
$16,500,000 at the end of 2015 , the cost to date were $7,590,000 and the estimated total costs to
complete had not changed . the progress billing during 2015 were $3,600,000 and the cash collected
during 2015 was 2,400,000.
1)for the year ended at December 31,2015 . Cooper would recognize gross profit on the building
a.$690,000 b.630,000 c.870,000 d.720,000
2)At December 31,2015 Cooper would report construction in progress in the amount
a.$8,000,000 b.8,280,000 c.8,700,000 d.7,280,000
Solution

2015
Cost to date cumulative 7,590,000
Estimated cost to complete 0
Total cost 16,500,000
% of completion to date 46%
Contract price 18,000,000
Revenue to date cumulative 8,280,000
(-) revenue in the prior year (00)
Revenue recognized each year 8,280,000
(-)actual cost incurred during the year (7,590,000)
Gross profit recognized each year 690,000
2)CIP= actual cost + gross profit
= 7,590,000 + 690,000 = 8,280,000.
Exercise 9 :
Dalton construction co. contracted to build a bridge for $5,000,000 . construction began in 2010 and was
completed in 2011 data relating to the construction are:
2010 2011
Costs incurred 1,650,000 1,375,000
Estimated costs to complete 1,350,000 -
Instruction:
a. how much revenue and gross profit should be reported for 2010 and 2011
b. make the entry to record the revenue and gross profit 2010

solution

2010 2011
Cost to date cumulative 1,650,000 3,025,000
Estimated cost to complete 1,350,000 0
Total cost 3,000,000 3,025,000
% of completion to date 1/3 55% 100%
Contract price (total revenue) 5,000,000 5,000,000
Revenue to date cumulative 2,750,000 5,000,000
(-) revenue to date in the prior year (0) (2,750,000)
Revenue recognized each year 2,750,000 2,250,000
(-)actual cost incurred during the year (1,650,000) (1,375,000)
Gross profit recognized each year 1,100,0000 875,000
b)

CIP (G.P) 1,100,000

Construction expenses 1,650,000
Revenue from the contracts 2,750,000

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Exercise 10 :
Eilert construction company had a contract starting April 2013 , to construct a 18,000,000 building that is
expected to be completed in august 2014 at an estimated cost of 16,500,000 . At the end of 2013 , the cost to
date were 7,590,000 and the estimated total cost to complete had not changed . the progress billings during
2013 were 3,600,000 and the cash collected during 2013 was 2,400,000 . Eilert uses the percentage of
completion method.
Required:
1.compute the amount of gross profit 2013
2.prepare journal entries 2013
solution
, ,
% of completion = =46%
, ,
Revenue to date = estimated total revenue18,000,000 x 46% completion = 8,280,000
Revenue for current period = revenue to date 8,280,000 – revenue prior year (0)= 8,280,000
Gross profit = revenue current year8,280,000 – actual cost 7,590,000 = 690,000

2013 entries
1.actual costs (incurred during the year)
CIP 7,590,000
Cash, inventory ,AP 7,590,000

2.Billings issued to customer during the year:

AR 3,600,000
Billing onCIP 3,600,000

3.cash collection from customer during the year:

Cash 2,400,000
AR 2,400,000

4.revenue and gross profit during the year :

CIP (gross profit) 690,000
Construction expense 7,590 ,000
Revenue from contract 8,280,000

Exercise 11:
Gomez, Inc. began work in 2015 on contract #3814, which provided for a contract price of €14,400,000.
Other details follow:
2015 2016
Costs incurred during the year €2,400,000 €7,350,000
Estimated costs to complete, as of December 31 7,200,000 0
Billings during the year 2,700,000 10,800,000
Collections during the year 1,800,000 11,700,000
Assume that Gomez uses the percentage-of-completion method of accounting. The portion of the total gross
profit to be recognized as income in 2015 is
a. €900,000. % of completion = 2,400,000 / 9,600,000 = 25%
b. €1,200,000. Revenue to date = 25% x 14,400,000 = 3,600,000
c. €3,600,000. Current revenue = 3,600,000 – Prior year revenue 0 = 3,600,000
d. €4,800,000 Gross Profit = current revenue 3,600,000 – current cost 2,400,000 = 1,200,000

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Exercise 12:
Use the following information for questions 1-4:
Seasons Construction is constructing an office building under contract for Cannon Company. The
contract calls for progress billings and payments of $1,240,000 each quarter. The total contract price is
$14,880,000 and Seasons estimates total costs of $14,200,000. Seasons estimates that the
building will take 3 years to complete, and commences construction on January 2, 2012.

1-At December 31, 2012, Seasons estimates that it is 30% complete with the construction,
based on costs incurred. What is the total amount of Revenue from Long-Term Contracts
recognized for 2012 and what is the balance in the Accounts Receivable account assuming
Cannon Cafe has not yet made its last quarterly payment?
Revenue Accounts Receivable
a. $4,960,000 $4,960,000
b. $4,260,000 $ 1,240,000
c. $4,464,000 $ 1,240,000
d. $4,260,000 $4,960,000

2- At December 31, 2013, Seasons Construction estimates that it is 75% complete with the building;
however, the estimate of total costs to be incurred has risen to $14,400,000 due to unanticipated price
increases. What is the total amount of Construction Expenses that Seasons will recognize for the year ended
December 31, 2013?
a. $10,800,000 b. $6,300,000 c. $6,390,000 d. $6,540,000

3-At December 31, 2013, Seasons Construction estimates that it is 75% complete with the building; however,
the estimate of total costs to be incurred has risen to $14,400,000 due to unanticipated price increases. What
is reported in the balance sheet at December 31,2013 for Seasons as the difference between the Construction
in Process and the Billings on Construction in Process accounts, and is it a debit or a credit?
Difference between the accounts Debit/Credit
a. $3,380,000 Credit
b. $1,240,000 Debit
c. $880,000 Debit
d. $1,240,000 Credit

4-Seasons Construction completes the remaining 25% of the building construction on December 31, 2014, as
scheduled. At that time the total costs of construction are $15,000,000. What is the total amount of Revenue
from Long-Term Contracts and Construction Expenses that Seasons will recognize for the year ended
December 31,2014?
Revenue expenses
a. $14,880,000 15,000,000
b. $3,720,000 3,750,000
c. $3,720,000 4,200,000
d. $3,750,000 3,750,000

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Solution(1 to 4) ‫اﻟﺣل ﺑﺗﺎع ﻛل اﻟﻠﻲ ﻓﺎت‬

2012 2013 2014

Cost to date cumulative 4,260,000 10,800,000 15,000,000
Estimated cost to complete 14,200,000x30% 14,400,000x75%
9,940,000 3,600,000 00
Total cost 14,200,000 14,400,000 15,000,000
% of completion to date 30% 75% 100%
Contract price 14,880,000 14,880,000 14,880,000
Revenue to date cumulative 4,464,000 11,160,000 14,880,000
(-) revenue in the prior year (0) (4,464,,000) (11,160,000)
Revenue recognized each year 4,464,000(1) 6,696,000 3,720,000
(-)actual cost incurred during the year (4,260,000) (6,540,000)(2) (4,200,000)(3)
Gross profit recognized each year 204,000 154,000 -480,000

2012 entries
1.actual costs (incurred during the year)
CIP 4,260,000
Cash, inventory ,AP 4,260,000

2.Billings issued to customer during the year: ‫ﺧﻠﻲ ﺑﺎﻟﻚ ﻋﻠﻲ ال‬Quarter
Billing on CIB = quarterly billing x 4 = 1,240,000 x 4 = 4,960,000
AR 4,960,000
Billing onCIP 4,960,000

4.revenue and gross profit during the year :

CIP (gross profit) (3) 204,000
Construction expense (2) 4,260,000
Revenue from contract 4,464,000

2013 entries
1.actual costs (incurred during the year)
CIP 6,540,000
Cash, inventory ,AP 6,540,000

2.Billings issued to customer during the year:

Quarter ‫ﺧﻠﻲ ﺑﺎﻟﻚ ﻋﻠﻲ ال‬
Billing on CIB = quarterly billing x 4 = 1,240,000 x 4 = 4,960,000
AR 4,960,000
Billing onCIP 4,960,000

4.revenue and gross profit during the year :

CIP (gross profit) 156,000
Construction expense 6,540,000
Revenue from contract 6,696,000
Difference = 4,260,000 +204,000 +6,540,000 +156,000 –(4,960,000 +4,960,000)=1,240,000

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Exercise 13:
Penner builders contracted to build a high –rise for 14,000,000 .construction began in 2010 and is expected
to be completed in 2013 . data for 2010 and 2011 are:
2010 2011
Costs incurred to date 1,800,000 5,200,000
Estimated costs to complete 7,20,000 4,800,000
The amount of gross Profit to be recognized for the year end 2011 should be
a. $1,080,000. b. $1,880,000. c. $1,700,000. d. $1,180,000.

2010 2011
Cost to date cumulative 1,800,000 5,200,000
Estimated cost to complete 7,200,000 4,800,000
Total cost 9,000,000 10,000,000
% of completion to date 1/3 20% 52%
Contract price (total revenue) 14,000,000 14,000,000
Revenue to date cumulative 2,800,000 7,280,000
(-) revenue to date in the prior year (0) (2,800,000)
Revenue recognized each year 2,800,000 4,480,000
(-)actual cost incurred during the year (1,800,0000) (3,400,000)
Gross profit recognized each year 1,000,000 1,080,000

Exercise 14:
Hayes Construction Corporation contracted to construct a building for $4,500,000. Construction
began in 2015 and was completed in 2016. Data relating to the contract are summarized below:
Year ended December 31,
2015 2016
Costs incurred during the year $1,800,000 $1,350,000
Estimated costs to complete 1,200,000 —
Hayes uses the percentage-of-completion method as the basis for income recognition. For the years
ended December 31, 2015, and 2016, respectively, Hayes should report revenue of:
a. $2,250,000 and $2,250,000.
b. $2,700,000 and $1,800,000.
c. $900,000 and $450,000.
d. $0 and $4,500,00
2015 2016
Cost incurred to date 1,800,000 3,150,000
+ Est. cost to Complete 1,200,000 0
Total est. Cost 3,000,000 3,150,000
% of completion 60% 100%
X Contract price 4,500,000 4,500,000
Revenue to date 2,700,000 4,500,000
- Prior periods revenue 0 (2,700,000)
Current year Revenue 2,700,000 1,800,000
- Current year cost (1,800,000) (1,350,000)
Gross Profit 900,000 450,000

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Exercise 15:
During 2015 Nilsen Company started a construction job with a contract price of $1,600,000. The job
was completed in 2017. The following information is available.
2015 2016 2017
Costs incurred to date $ 400,000 825,000 1,070,000
Estimated costs to complete 600,000 275,000 -0-
Billings to date 300,000 900,000 1,600,000
Collections to date 270,000 810,000 1,425,000
1-the amount of gross profit to be recognized each year assuming the percentage-of completion
method is used.
a-$240,000 &$135,000 &$155,000 b-$135,000 & $20,000 &$65,000
c-$240,000 &$125,000 &$135,000 d-$125,000 &$170,000 &$300,000
2-what is the amount of gross profit recognized each year assuming the cost-recovery method used.
a. $530,000. b. $380,000. c. $350,000. d. $320,000.
Solution

2015 2016 2017

Cost incurred to date (1) {Given} 400,000 825,000 1,070,000

+ estimated cost to complete (2) {Given} 600,000 275,000 -
Total estimated cost (3) = (1+2) 1,000,000 1,100,000 1,070,000
% of completion (4) = (1) / (3) 40% 75% 100%
X Contract price (5) given X1,600,000 X1,600,000 X1,600,000
Revenue recognized to date (6) =(4x 5) 640,000 1,200,000 1,600,000
- Revenue in prior periods (7) 0 640,000 1,200,000
Current year revenue 640,000 560,000 400,000
- Actual current year cost (400,000) (425,000) (245,000)
Recognized Gross profit for current year 240,000 135,000 155,000

b) journal entries 2016

1.actual costs (incurred during the year)
CIP 425,000
Cash, inventory ,AP 425,000
2.Billings issued to customer during the year:
AR 600,000
Billing onCIP 600,000

3.cash collection from customer during the year:

Cash 540,000
AR 540,000
4.revenue and gross profit during the year :
CIP (gross profit 135,000
Construction expense 425,000
Revenue from contract 560,000
(c) Cost-recovery method:
Gross profit recognized in:
2015 2016 2017
Gross profit -0- -0- 530,000
GP 2017= Contract price – TC
€1,600,000 – €1,070,000 = 530,000

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Exercise 16:
Hamilton Construction Company uses the percentage-of-completion method of accounting. In 2015,
Hamilton began work under contract #E2-D2, which provided for a contract price of $2,200,000.
Other details follow:
2015 2016
Costs incurred during the year $640,000 $1,425,000
Estimated costs to complete, as of Dec.31 960,000 –0–
Billings during the year 420,000 1,680,000
Collections during the year 350,000 1,500,000
1-What portion of the total contract price would be recognized as revenue in 2015? In 2016?
a.$800,000 & 420,000 b. $880,000 & 1,320,000
c.$230,000 & 170,000 d.$880,000 & 2,200,000
2-What is the amount of gross Profit that should be recognized 2015? In 2016?
a.$160,000 & 420,000 b. $240,000 & (105,000)
c.$230,000 & 170,000 d.$240,000 & 105,000

3- assume that Hamliton uses the cost recovery Method what is the Portion of the total contract
Price that should be recognized as Gross Profit 2016
a.$420,000 b. $135,000 c.$170,000 d.$2,200,000
Solution

2015 2016
Cost incurred to date 1 640,000 2,065,000
+ Est. cost to Complete 2 960,000 0
Total est. Cost = 1+2 = 3 1,600,000 2,065,000
P% of completion1 / 3 = 4 40% 100%
X Contract price 5 2,200,000 2,200,000
Revenue to date 4 x 5 = 6 880,000 2,200,000
- Prior periods revenue 0 (880,000)
Current year Revenue 880,000 1,320,000
- Current year cost (640,000) (1,425,000)
Gross Profit 240,000 (105,000)

Gross profit in 2016 if cost recovery Method =

contract Price £2,200,000 – total est.cost to date £2,065,000 = 135,000
Exercise 17:
Lee Company received an $1,800,000 subsidy from the government to purchase manufacturing
equipment on January 1, 2015. The equipment has a cost of $3,000,000, a useful life six years, and no
salvage value. Lee depreciates the equipment on a straight-line basis.
1-If Lee chooses to account for the grant as deferred revenue, the grant revenue recognized will be:
a-Zero in the first year of the grant's life.
B-300,000for the year 2017. Grant revenue recognized = 1,800, 000 ÷ 6 = 300,000.
c-500,000 per year for the years 2015-2020.
d-1800000 in 2015.
2-If Lee chooses to account for the grant as a reduction of the asset, the amount of depreciation
expense recorded in 2015 will be:
a.$0. B.200,000. C.300,000. D. 500,000

the cost of the asset = 3,000,000 – 1,800,000 = 1,200,000

dep. Ex. 2015 = 1 200 000 ÷ 6 = 200 000.

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True &False questions:
1- the construction in process account includes only construction cost under percentage of completion method.
2-revenue is recognized in the accounting period when the performance obligation is satisfied.
3-the first step in the revenue recognition process is to identify the separate performance obligations in the contract.
4-if the performance obligation is not highly dependent on, or interrelated with other promises in the contract , then
each performance obligation should be accounted for separately.
5-a company can only satisfy its performance obligations at a point in time.
6-the new revenue recognition standard adopted a liability approach as the basis for revenue recognition.
7-revenue from a contact with a customer cannot be recognized until a contract exists.
8-if the difference between the construction in process and the billings on construction in progress account balances is
debit , the difference is reported as a current assets.
9-The most popular input measure used to determine the progress toward completion is the
cost-to-cost basis.
10-Companies can recognize revenue prior to completion and delivery of the product under
certain circumstances.
11-Companies must use the percentage-of-completion method when estimates of progress
toward completion are reasonably dependable.
12-If a company sells its product but gives the buyer the right to return it, the company should
not recognize revenue until the sale is collected.
13-the billing account and construction in Progress account can't exceed the Long term contract Price.
14-The new revenue recognition standard adopted the asset approach as the basis for revenue recognition.
15- The Construction in Process is a current asset.
16-Under the percentage-of-completion method, the Construction in Process account includes only construction costs
of the year
17. Companies MUST allocate the transaction price to more than one performance obligation in a contract.
18-A company recognizes revenue from a performance obligation over time by measuring the progress toward
completion.
19- A contract liability is a company’s obligation to transfer goods or services to a customer for which the company has
received consideration from the customer.
20- Companies should recognize revenue when it is realized and when cash is received.
1-F 2-T 3-F 4-T 5-T 6-F
7-T 8-T 9-T 10-T 11-F 12-F 13-T
14-F 15-T 16-F 17-F 18-T 19-T 20-F

Multiple choice questions:

1-Revenue from contract with a customer
a. is recognized when the customer receive the rights to receive consideration.
b. is recognized even if the contract is still wholly unperformed.
c. can be recognized even when is still Pending.
d. cannot be recognized until a contact exists

2-a contract
a. Must be in writing to be an enforceable contract.
b. is an agreement that creats enforceable rights and obliations.
c. is enforceable if each Party can unilaterally terminate the contract.
d. Does not need to have commercial substance

3-to address inconsistence and weakness a comprehensive revenue recognition model was developed entitled
the
a. Revenue recognition Principle b. Principle –based revenue accounting
C. rules –based revenue accounting d. Revenue from contracts with customers

4- the converged standard on revenue recognition

a. reduces the number of disclosures required for revenue reporting.
b. increases the complexity of financial statement preparation
c. recognizes and measures revenue based on changes in assets and liabilities.
d. simpilifies revenue recognition Practicies across entities and industries

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5-The first step in the process for revenue recognition is
a. determine the transaction Price b. identify the contract with customers.
c. allocate the transaction Price to separate performance obligation
d. Identify the separate performance obligation in the contract.

6-The second step in the process for revenue recognition is

a. determine the transaction Price
b. identify the contract with customers.
c. allocate the transaction Price to separate performance obligation
d. Identify the separate performance obligation in the contract.

7-The third step in the process for revenue recognition is

a. determine the transaction Price
b. identify the contract with customers.
c. allocate the transaction Price to separate performance obligation
d. Identify the separate performance obligation in the contract.

8-The fourth step in the process for revenue recognition is

a. determine the transaction Price
b. identify the contract with customers.
c. allocate the transaction Price to separate performance obligation
d. Identify the separate performance obligation in the contract.

9-The fifth step in the process for revenue recognition is

a. determine the transaction Price
b. Recognize revenues when each Performance obligation is satisfied.
c. allocate the transaction Price to separate performance obligation
d. Identify the separate performance obligation in the contract.

10. According to the FASB's conceptual framework, the process of reporting an item in the financial
statements of an entity is
a. recognition. b. realization. c. allocation. d. matching

1-d 2-b 3-d 4-C 5-b 6-d 7-A 8-C 9-b 10-A

"see you next year "ISA"

1st semester
Business &Other Departments Accounting Department
 Cost Accounting  Cost accounting
 Companies accounting

M.Marzouk

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