Question

Sorenson Manufacturing Corporation was incorporated on January 3, 2013. The corporation’s financial statements for its first year’s operations were not examined by a CPA. You have been engaged to audit the financial statements for the year ended December 31, 2014, and your work is substantially completed. A partial trial balance of the company’s accounts follows:

SORENSON MANUFACTURING CORPORATION
Trial Balance
at December 31, 2014
	Debit			Credit
Cash	$	11,000
Accounts receivable		42,500
Allowance for doubtful accounts				$	500
Inventories		38,500
Machinery		75,000
Equipment		29,000
Accumulated depreciation					10,000
Patents		85,000
Leasehold improvements		26,000
Prepaid expenses		10,500
Organization expenses		29,000
Goodwill		24,000
Licensing Agreement No. 1*		50,000
Licensing Agreement No. 2*		49,000

* An intangible asset representing the right to use a patent.

The following information relates to accounts that may yet require adjustment:

1.	Patents for Sorenson’s manufacturing process were purchased January 2, 2014, at a cost of $68,000. An additional $17,000 was spent in December 2012 to improve machinery covered by the patents and charged to the Patents account. The patents had a remaining legal term of 17 years.
2.	On January 3, 2011, Sorenson purchased two licensing agreements; at that time they were believed to have unlimited useful lives. The balance in the Licensing Agreement No. 1 account included its purchase price of $48,000 and $2,000 in acquisition expenses. Licensing Agreement No. 2 also was purchased on January 3, 2013, for $50,000, but it has been reduced by a credit of $1,000 for the advance collection of revenue from the agreement.
3.	In December 2013, an explosion caused a permanent 60 percent reduction in the expected revenue-producing value of Licensing Agreement No. 1 and, in January 2014, a flood caused additional damage, which rendered the agreement worthless.
4.	A study of Licensing Agreement No. 2 made by Sorenson in January 2014 revealed that its estimated remaining life expectancy was only 10 years as of January 1, 2014.
5.	The balance in the Goodwill account includes $24,000 paid December 30, 2013, for an advertising program, which it is estimated will assist in increasing Sorenson’s sales over a period of four years following the disbursement.
6.	The Leasehold Improvement account includes (a) the $15,000 cost of improvements with a total estimated useful life of 12 years, which Sorenson, as tenant, made to leased premises in January 2013; (b) movable assembly-line equipment costing $8,500, which was installed in the leased premises in December 2014; and (c) real estate taxes of $2,500 paid by Sorenson, which, under the terms of the lease, should have been paid by the landlord. Sorenson paid its rent in full during 2014. A 10-year nonrenewable lease was signed January 3, 2013, for the leased building that Sorenson used in manufacturing operations.
7.	The balance in the Organization Expenses account includes preoperating costs incurred during the organizational period.

Required:

a.	For each of the items 1–7, prepare adjusting entries as necessary. (Omit the '$" sign in your response.)

Sl No.	General Journal	Debit	Credit
1.	(Click to select)MachineryRetained earningsCost of goods soldGoodwillLeasehold improvementsOrganizational expensesRevenue received in advanceLicensing agreement no. 2
	(Click to select)EquipmentRetained earningsRevenue received in advancePatentsDrawingsOrganizational expensesBuildingsCost of goods sold
	To transfer cost of improving machinery to the fixed asset account
	(Click to select)EquipmentPatentsBuildingsOrganizational expensesRetained earningsCost of goods soldRevenue received in advanceLicensing agreement no. 2
	(Click to select)Retained earningsEquipmentCost of goods soldOrganizational expensesGeneral expensesBuildingsPatentsGoodwill
	To record straight-line amortization of patents for the year
2.	(Click to select)GoodwillMachineryPatentsOrganizational expensesLicensing agreement no. 2Retained earningsLeasehold improvementsCost of goods sold
	(Click to select)MachineryPatentsRetained earningsRevenue received in advanceLicensing agreement no. 2EquipmentCost of goods soldInventory
	To record unearned revenue in a deferred credit account
3.	(Click to select)Organizational expensesRevenue received in advanceGoodwillLeasehold improvementsMachineryLicensing agreement no. 2Retained earningsCost of goods sold
	(Click to select)Organizational expensesLeasehold improvementsRevenue received in advanceGoodwillEquipmentCost of goods soldLicensing agreement no.1Machinery
	To record the 60% loss caused by the explosion in the prior year. Correction of an accounting error of the prior year. Write-off of damage due to flood
4.	(Click to select)Leasehold improvementsGoodwillRetained earningsMachineryCost of goods soldOrganizational expensesRevenue received in advanceEquipment
	(Click to select)MachineryCost of goods soldGoodwillOrganizational expensesPatentsLeasehold improvementsLicensing agreement no. 2Accounts receivable nontrade
	To record amortization for the year on straight-line basis, 10-year life
5.	(Click to select)Retained earningsEquipmentGoodwillRevenue received in advancePatentsCost of goods soldLeasehold improvementsOrganizational expenses
	(Click to select)GoodwillMachineryPatentsCost of goods soldOrganizational expensesEquipmentRetained earningsLeasehold improvements
	To correct the accounting error of last year of improperly capitalizing an expense item
6.	(Click to select)Organizational expensesPatents EquipmentCost of goods soldGoodwillLicensing agreement no. 2Accounts receivable nontradeLeasehold improvements
	(Click to select)GoodwillAccounts receivable nontradePatents Organizational expensesEquipmentLeasehold improvementsCost of goods soldLicensing agreement no. 2
	(Click to select)EquipmentLeasehold improvementsPatentsOrganizational expensesRevenue received in advanceBuildingsAccounts receivable nontradeCost of goods sold
	To record equipment in the proper account and to record a receivable for the real estate taxes
	(Click to select)Amortization expense-error correctionPatents Licensing agreement no. 2Cost of goods soldOrganizational expensesRetained earningsGoodwillAmortization expense-current year
	(Click to select)Cost of goods soldGoodwillLicensing agreement no. 2Organizational expensesPatents Amortization expense-error correctionAmortization expense-current yearRetained earnings
	(Click to select)DrawingsLicensing agreement no. 2BuildingsRetained earningsGeneral expensesLeasehold improvementsCost of goods soldOrganizational expenses
	To record current amortization and correct the error of failure to record amortization of leasehold improvements on a straight-line, 10-year basis. No adjustment to depreciation of equipment because it was acquired in December
7.	(Click to select)MachineryEquipmentPatentsOrganizational expensesCost of goods soldInventoryRetained earningsRevenue received in advance
	(Click to select)BuildingsLicensing agreement no.2Organizational expensesPatentsEquipmentRevenue received in advanceRetained earningsCost of goods sold
	To write off organizational expenses improperly capitalized in prior period

References

eBook & Resources

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