Presented below is information related to copyrights owned by Walter de la Mare

Question

Presented below is information related to copyrights owned by Walter de la Mare Company at December 31, 2014.

Assume that Walter de la Mare Company will continue to use this copyright in the future. As of December 31, 2014, the copyright is estimated to have a remaining useful life of 10 years.

Prepare the journal entry to record amortization expense for 2015 related to the copyrights. (If no entry is required, select "No entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Cost $8,564,300 Carrying amount 4,321,200 Expected future net cash flows 3,972,700 Fair value 3,485,800

Explanation / Answer

Let us first test for any copyright impairment. Asuming we follow US-GAAP, impairment is tested in following steps.

Step - 1. Compare carrying amount to undiscounted future cash flow.

We see that carrying amount ($4,321,200) is higher than expected future cash flows ($3,972,700). This indicates an impairment of the copyright.

Step - 2. Estimate Impairment loss.

Impairment loss = Carrying value - Fair value

= $(4,321,200 - 3,485,800) = $835,400

Therefore, the Fair Value is the basis for Amortization.

Annual amortization expense = $3,485,800 / 10 years [Useful life] = $348,580 per year

Accordingly, journal entry will be:

DR Amortization Expense - Copyright $348,580

Intangible Assets - Copyright $348,580

(To record amortization of copyright after adjusting for impairment)

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