Question
Cardinal Company Year Ended December 31, Cardinal Company Income Statement 2020 2019 Balance Sheet December 31, Sales $92,600 $89,250 2020 2019 Cost of goods sold
Cardinal Company Year Ended December 31, Cardinal Company Income Statement 2020 2019 Balance Sheet December 31, Sales $92,600 $89,250 2020 2019 Cost of goods sold 39,632 36,270 Cash $14,300 $15,100 Gross profit 52,968 52,980 Accounts receivable 4,100 4,300 Selling and administrative expense 14,500 12,300 Inventory 5,000 4,700 Depreciation expense 9,300 8,700 Plant and equipment 483,000 479,000 Amortization expense 3,750 3,750 Patent 18,750 22,500 Net income before tax 25,418 28,230 Total assets $525,150 $ 525,600 Income tax expense 5,084 5,646 Accounts payable $11,300 $12,800 Net income $20,334 $22,584 Taxes payable 7,936 8,870 Note payable 130,000 130,000 Cardinal Company Year Ended December 31, Common stock & APIC 275,846 288,096 Statement of Retained Earnings 2020 2019 Retained earnings 100,068 85,834 Beginning retained earnings $85,834 $69,350 Total liabilities and stockholders' equity $525,150 $ 525,600 Net income 20,334 22,584 Dividends (6,100) (6,100) Ending Retained Earnings $100,068 $85,834 Shown above are the income statements, statements of retained earnings, and balance sheets for Cardinal Company for the years 2019 and 2020. Assume Cardinal Company developed a new, innovative process for manufacturing their product, and had that process successfully patented (an intangible asset) at a cost of $30,000, on January 1, 2018.At that time, the patent was assigned an 8-year useful life and as such has been amortized at the rate of $3,750 per year ($30,000/8yrs).You can see this in the book value of the patent for 2019 ($22,500, which is the $30,000 minus 2018 and 2019 amortization of $3,750 each year) and 2020 ($18,750, which is the $30,000 minus 2018, 2019, and 2020 amortization). Each year's journal entry for this amortization was a debit to Amortization expense and credit to Patent. Pretend that near the end of 2020, the Financial Accounting Standards Board (FASB) issued a new pronouncement which requires that intangible assets not be amortized, that they be kept on the books at original cost, as is done with land.In changing their accounting to comply with this new pronouncement, Cardinal Company decided to go all the way back to 2018 and treat the patent as though it had never been amortized.Income tax expense is at the rate of 20% of net income before tax.The comparative financial statements shown above reflect the old accounting process, that the patent is amortized. Required: (1) Prepare the necessary 2020 journal entries to reflect the change in GAAP described above. (2) Prepare revised financial statements which reflect the change in GAAP described above.
Cardinal Company Year Ended December 31, Cardinal Company
Income Statement 2020 2019 Balance Sheet December 31,
Sales $92,600 $89,250 2020 2019
Cost of goods sold 39,632 36,270 Cash $14,300 $15,100
Gross profit 52,968 52,980 Accounts receivable 4,100 4,300
Selling and administrative expense 14,500 12,300 Inventory 5,000 4,700
Depreciation expense 9,300 8,700 Plant and equipment 483,000 479,000
Amortization expense 3,750 3,750 Patent 18,750 22,500
Net income before tax 25,418 28,230 Total assets $525,150 $525,600
Income tax expense 5,084 5,646 Accounts payable $11,300 $12,800
Net income $20,334 $22,584 Taxes payable 7,936 8,870
Note payable 130,000 130,000
Cardinal Company Year Ended December 31, Common stock & APIC 275,846 288,096
Statement of Retained Earnings 2020 2019 Retained earnings 100,068 85,834
Beginning retained earnings $85,834 $69,350 Total liabilities and stockholders' equity $525,150 $525,600
Net income 20,334 22,584
Dividends (6,100) (6,100)
Ending Retained Earnings $100,068 $85,834
Shown above are the income statements, statements of retained earnings, and balance sheets for Cardinal Company for the years 2019 and 2020.
Assume Cardinal Company developed a new, innovative process for manufacturing their product, and had that process successfully patented
(an intangible asset) at a cost of $30,000, on January 1, 2018.At that time, the patent was assigned an 8-year useful life and as such has
been amortized at the rate of $3,750 per year ($30,000/8yrs).You can see this in the book value of the patent for 2019 ($22,500, which is the
$30,000 minus 2018 and 2019 amortization of $3,750 each year) and 2020 ($18,750, which is the $30,000 minus 2018, 2019, and 2020 amortization).
Each year's journal entry for this amortization was a debit to Amortization expense and credit to Patent.
Pretend that near the end of 2020, the Financial Accounting Standards Board (FASB) issued a new pronouncement which requires that intangible
assets not be amortized, that they be kept on the books at original cost, as is done with land.In changing their accounting to comply with
this new pronouncement, Cardinal Company decided to go all the way back to 2018 and treat the patent as though it had never been
amortized.Income tax expense is at the rate of 20% of net income before tax.The comparative financial statements shown above reflect
the old accounting process, that the patent is amortized.
Required:
(1) Prepare the necessary 2020 journal entries to reflect the change in GAAP described above.
(2) Prepare revised financial statements which reflect the change in GAAP described above.
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