Question

Consider each of the transactions below. All of the expenditures were made in cash.

1. The Edison Company spent $22,000 during the year for experimental purposes in connection with the development of a new product.
2. In April, the Marshall Company lost a patent infringement suit and paid the plaintiff $7,000.
3. In March, the Cleanway Laundromat bought equipment. Cleanway paid $16,000 down and signed a noninterest-bearing note requiring the payment of $23,000 in nine months. The cash price for this equipment was $35,000.
4. On June 1, the Jamsen Corporation installed a sprinkler system throughout the building at a cost of $38,000.
4. The Mayer Company, plaintiff, paid $22,000 in legal fees in November, in connection with a successful infringement suit on its patent.
5. The Johnson Company traded its old equipment for new equipment. The new equipment has a fair value of $13,000. The old equipment had an original cost of $12,400 and a book value of $6,000 at the time of the trade. Johnson also paid cash of $10,000 as part of the trade. The exchange has commercial substance.

Required:
Prepare journal entries to record each of the above transactions.

Answer 1

Answer: Please see explanation column for answers

Explanation:

1.Journal to record amount spent on experimental purposes for development of new product

Date          Account                               Debit                Credit

Research and development expense $ 22,000.00

Cash                                                                             $22,000.00

2.  Journal to record amount paid for legal fees for lost in infringement suit

Date          Account                               Debit                Credit

April      legal fee expense           $7,000.00

             Cash                                                             $ 7,000.00

3. Journal to record amount and note payable for purchase of equipment

Date          Account                               Debit                Credit

March     Equipment                        $ 35,000.00

Discount on note payable                 4,000.00

 Cash                                                                            $ 16,000.00

Note payable                                                               $ 23,000.00

Calculation:

Discount on note payable=  (23,000 +16,000)- $35,000 = $4000

4Journal to record amount paid for installation of sprinkler system

Date          Account                               Debit                Credit

June 1 Building- sprinkler system       $ 38,000.00

      Cash                                                                     $ 38,000.00

5

Journal to record amount received by plaintiff for successful infringement

Date          Account                               Debit                Credit

patent                                   $ 22,000.00

Cash                                                                            $ 22,000.00

6.Journal to record  purchase of new machine in exchange of old one

 Date          Account                               Debit                Credit

new machine-fair value                   $ 13,000.00  

lost in trade-in                                   $ 3,000.00  

Accumulated depreciation                $6,400.00

  old machine                                                              $ 12,400.00

   Cash                                                                         $ 10,000.00

Calculation:

lost in trade-in = book value of old machine + cash paid for machine -  fair value of new equipment =(6000+10000-13000)

= $3000  

Accumulated depreciation=original cost of old machine - book value = $12400- $6000=$6,400