Problem 1

Cunningham Company sold the following two machines in 2007:

Machine A Machine B

Cost $84,000 $60,000

Purchase date 7/1/03 1/1/04

Useful life 8 years 5 years

Salvage value $4,000 $3,000

Depreciation method Straight-line Straight-line

Instructions

Journalize all entries required to update depreciation of the two assets in 2007. The company has recorded depreciation on the machine through December 31, 2006.

Assume that the sale of the assets was on December 31.

Problem 2

(a) A company purchased a patent on January 1, 2007, for $2,500,000. The patent's legal life is 20 years but the company estimates that the patent's useful life will only be 5 years from the date of acquisition. On June 30, 2007, the company paid legal costs of $162,000 in successfully defending the patent in an infringement suit. For the journal entry to amortize the patent at year end on December 31, 2007, state the accounts involved, the type of account, if it is increasing or decreasing, the amount it is changing, and which statement it affects.

(b) Edmond Company purchased a franchise from the Yummy Food Company for $450,000 on January 1, 2007. The franchise is for an indefinite time period and gives Edmond Company the exclusive rights to sell Yummy Wings in a particular territory. For the journal entries to record the acquisition of the franchise and any necessary adjusting entry at year end on December 31, 2007, state the accounts involved, the type of account, if it is increasing or decreasing, the amount it is changing, and which statement it affects.

(c) Brinkley Company incurred research and development costs of $500,000 in 2007 in developing a new product. For the journal entries during 2007 to record these events and any adjustments at year end on December 31, 2007, state the accounts involved, the type of account, if it is increasing or decreasing, the amount it is changing, and which statement it affects.