Hollington Corp.’s controller was preparing the year-end adjusting entries for the company’s year ended December 31, 2011, when the V.P. Finance called him into her office. “Jean-Pierre,” she said, “I’ve been considering a couple of matters that may require different treatment this year. First, the patent we acquired in early January 2009 for $410,000 will now likely be used until the end of 2013 and then be sold for $110,000. We previously thought that we’d use it for 10 years in total and then be able to sell it for $50,000. We’ve been using straight-line amortization on the patent.
“Secondly, I just discovered that the property we bought midway through 2008 for $135,000 was charged entirely to the Land account instead of being allocated between Land ($33,750) and Building ($101,250). The building should be of use to us for a total of 20 years. At that point, it’ll be sold and we should be able to realize at least $37,000 from the sale of the building.
“Please let me know how these changes should be accounted for and what effect they will have on the financial statements.”
Instructions
(a) Briefly identify the accounting treatment that should be applied to each accounting change that is required.
(b) Assuming that no amortization has been recorded as yet for the patent for 2011, prepare the December 31, 2011 entries that are necessary to make the accounting changes and to record patent amortization expense for 2011.
(c) Identify, and calculate where possible, the required disclosures for each change.
(d) Discuss the timing of applying the change in the patent’s useful life and residual value. Since the determination of the change was done as part of the year-end process, should the change be applied to 2011 going forward, or to 2012 going forward? What are the implications of each approach?
(e) Could Hollington’s controller consider the patent to be impaired instead of revising its useful life and residual value?
What criteria should the controller look at to determine the appropriate treatment?