Lee Manufacturing Corporation was incorporated on January 3, 2006. The corporation’s financial statements for its first year’s operations were not examined by a CPA. You have been engaged to examine the financial statements for the year ended December 31, 2007, and your examination is substantially completed. The corporation’s trial balance at December 31, 2007 appears as follows:

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

1. Patents for Lee’s manufacturing process were acquired January 2, 2007 at a cost of $68,000. An additional $17,000 was spent in December 2007 to improve machinery covered by the patents and charged to the Patents account. Depreciation on fixed assets has been properly recorded for 2007 in accordance with Lee’s practice, which provides a full year’s depreciation for property on hand June 30 and no depreciation otherwise. Lee uses the straight-line method for all depreciation and amortization and amortizes its patents over their legal life.

2. On January 3, 2006 Lee purchased Licensing Agreement No. 1, which was believed to have an indefinite useful life. The balance in the Licensing Agreement No. 1 account includes its purchase price of $48,000 and costs of $2,000 related to the acquisition. On January 1, 2007 Lee purchased Licensing Agreement No. 2, which has a life expectancy of 10 years. The balance in the Licensing Agreement No. 2 account includes its $48,000 purchase price and $2,000 in acquisition costs, but it has been reduced by a credit of $1,000 for the advance collection of 2008 revenue from the agreement. In late December 2006 an explosion caused a permanent 60% reduction in the expected revenue-producing value of Licensing Agreement No. 1, and in January 2008 a flood caused additional damage that rendered the agreement worthless. 

3. The balance in the Goodwill account includes 

(a) $8,000 paid December 30, 2006 for newspaper advertising for the next four years following the payment, and 

(b) Legal costs of $16,000 incurred for Lee’s incorporation on January 3, 2006.

4. The Leasehold Improvements account includes 

(a) The $15,000 cost of improvements with a total estimated useful life of 12 years, which Lee, as tenant, made to leased premises in January 2006,

(b) Movable assembly line equipment costing $8,500 that was installed in the leased premises in December 2007, and 

(c) Real estate taxes of $2,500 paid by Lee in 2007, which under the terms of the lease should have been paid by the landlord. Lee paid its rent in full during 2007. A 10-year nonrenewable lease was signed January 3, 2006 for the leased building that Lee used in manufacturing operations.

5. The balance in the Organization Costs account includes costs incurred during the organizational period.

Required

Prepare a worksheet (spreadsheet) to adjust accounts that require adjustment and prepare financial statements. A separate account should be used for the accumulation of each type of amortization and for each prior period adjustment. Formal adjusting journal entries and financial statements are not required. No intangibles are impaired at the end of 2007. Ignore income taxes.

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Debit $ 61,000 92,500 Credit Cash Accounts receivable Allowance for doubtful accou Inventories Machinery Equipment Accumulated depreciation Patents Leasehold improvements Prepaid expenses Organization costs Goodwill Licensing agreement No. 1 Licensing agreement No. 2 Accounts payable Unearned revenue Capital stock Retained earnings, anuary 1, 2007 Sales Cost of goods sold Selling and general expenses Interest expense Extraordinary losses nts 500 38,500 75,000 29,000 0,000 85,000 26,000 10,500 29,000 24,000 50,000 49,000 147,500 12,500 300,000 27,000 768,500 454,000 173,000 3,500 12,000 Total $1,239,000 $1,239,000