8-51 Various Intangible Assets and Impairment (Alternative is 8-52.) Consider th
ID: 2414678 • Letter: 8
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8-51 Various Intangible Assets and Impairment (Alternative is 8-52.) Consider the following: OBJECTIVES 11, 12 1. On December 29, 20X1, a publisher acquires the paperback copyright for a book by Steven King for $3 million. Most sales of this book are expected to take place uniformly during 20X2 and 20X3. What is the amortization for 20X2? 2. In 20X1, Company C spent $6 million in its research department, which resulted in new valuable patents. In late December 20X1, Company D paid $6 million to an outside inventor for some valuable new patents. Under U.S. GAAP, how would the income statements for the year ended December 31, 20X1, for each company be affected? How would the balance sheets as of December 31,20X1, be affected? 3. On December 28, 20X8, Black Electronics Company purchased a patent for a piece of equipment for $500,000. The patent has 10 years of its legal life remaining. Technology ASSIGNMENT MATERIAL 375 changes fast, so Black Electronics expects the patent to be worthless in 5 years. What is the amortization for 20X9? 4. (a) During the fiscal year ending December 31, 20X3, Samela Corporation paid $12 million in cash for Haddock Company. At the time of the acquisition, the total assets of Haddock had a fair value of $22milion and the total liabilities had a fair value of $15 million. What journal entry would Samela Corporation make to record the acquisition of Haddock? (b) On December 31, 20X4, Samela Corporation performed a recovery test, which determined that the goodwill recorded in the initial transaction had become impaired. A further review indi cated that the fair value of the goodwill was $3 million. Does Samela need to make a journal entry to recognize the impairment of goodwill? If so, prepare the entryExplanation / Answer
1. What is the amortization for 20x2?
Answer: As in the question says the sales are made uniformly for the next two years and no specific useful life of the copyright, we will take the useful life as two years.
Amortization Expense for 20x2 = $ 3,000,000 / 2
= $ 1,500,000
2. How would the balance sheets as of December 31, 20x1, be affected?
Answer: As per the provision of the law an asset should be recognized when there is a future economic benefits from the assets to the entity over the period of life. Here company c spent $ 6,000,000 in its research department, which resulted in new valuable patents. If the company expects and proves that future economic benefits will flow from the patents through rent or cost reduction, etc., the company can capitalize the expenditure and amortize over the period of life or else it should charge the same as expenditure.
In another case company d paid $ 6,000,000 to an outsider for some new valuable patents. Here also it is same that is if the company expects and proves future economic benefits will flow to the entity they can capitalize the patents under intangible assets and amortize over the period of life, if not, charge as expenditure in books.
3. What is the amortization for 20x9?
Answer: An Intangible asset can be amortized over the useful period of the life based on the reasonable judgement as at the time of acquisition. Here even though the legal life period is 10 years the useful life the management expecting 5 years which provides reasonable and should be amortized over 5 years.
Amortization Expense = $ 500,000 / 5
= $ 100,000
4. Does Samela need to make journal entry to recognize the impairment of goodwill? If so, prepare the entry?
Answer: As the company has paid $12 million to acquire haddock company where the haddock company has $7 million net assets, goodwill of $5 million arises which should be a amortized as well as the company should perform impairment test to see whether any impairment is there and should provide for such impairment loss.
Here in the question it is given that a recovery test determined that the goodwill recorded in the initial transaction has been impaired and further review indicated that the fair value of the goodwill is $3 million.
If they have passed impairment entry for full value of goodwill before the further review, the goodwill will be zero and it can’t be reversed.
If they have not passed the impairment entry then the actual amortization entry will be passed along with the impairment entry as follows:
Impairment Loss on Goodwill A/C $ 200,000
Goodwill A/C $ 200,000
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