Question

Martinez Corporation commenced operations in early 2020. The corporation incurred $48,500 of costs such as fees to underwriters, legal fees, state fees, and promotional expenditures during its formation. Prepare journal entries to record the $48,500 expenditure and 2020 amortization, if any.

Answer 1

Answer:

See below.

Explanation:

Since the expenses are related to the formation of the business, we first capitalize these expenses and record them in our balance sheet as,

Debit Intangible Assets (Formation) by $48,500

Credit Cash/Bank by $48,500

This records an asset for the year of operation.

We amortize or depreciate these type of capitalized costs over a defined period of time. Assuming that we write off the entire cost by the end of first year we will record amortization as,

Debit Amortization expense/Income statement by $48,500

Credit Intangible Assets (Formation) by $48,500

Hope that helps.