2. (50 points) On January 1, 2015, Lagina Company purchased Blankenship, Inc. by
ID: 2458450 • Letter: 2
Question
2. (50 points) On January 1, 2015, Lagina Company purchased Blankenship, Inc. by paying $2,300,000. At December 31, 2014, the balance sheet of Blankenship, Inc. was as follows:
Cash
$ 150,000
Accounts payable
$ 30,000
Inventory
40,000
Notes payable
400,000
Land
700,000
Common Stock
1,500,000
Buildings (net)
200,000
Retained Earnings
20,000
Equipment (net)
750,000
Franchise (net)
100,000
Patent (net)
10,000
Total assets
$ 1,950,000
Total liabilities and equity
$ 1,950,000
All fair values are equal to their book values with the following exceptions:
Land – fair value of $800,000
Buildings – fair value of $300,000
Equipment – fair value of $700,000
Franchise – fair value of $200,000
Patent – fair value of $400,000
The franchise expires on December 31, 2017 and the patents have a remaining legal life of 6 years with an estimated useful life of 4 years.
On July 1, 2015, Lagina paid $20,000 to successfully defend its patent.
During 2015, Lagina incurred $800,000 of experimental and development costs to develop a new drilling methodology. In 2016, legal fees and other costs associated with registration of the related patent totaled $18,000. A patent for this technology was granted on March 31, 2016. The patent has a legal and estimated useful life of 7 years.
Due to a change in the local regulatory climate, at the end of 2015, after recording amortization, Lagina determined it was necessary to assess impairment on the franchise. At December 31, expected future cash flows are $150,000 and estimated fair value is $130,000.
On April 1, 2016, Lagina sold the patent acquired in 2015 in exchange for $300,000 cash.
At the end of 2015, Lagina determined that there was no goodwill impairment. As part of year-end testing in 2016, Lagina collected the following information (as of December 31):
Book value of net assets (including goodwill)
$550,000
Estimated net future cash flows
$800,000
Fair value of net assets (including goodwill)
$525,000
Fair value of net assets (excluding goodwill)
$475,000
Requirements:
Compute the book value for each of the above mentioned intangible assets at December 31, 2015 and 2016.
Compute the income statement effects for 2015 and 2016 for each of the above mentioned transactions.
**Round all computations to the nearest whole dollar.
Cash
$ 150,000
Accounts payable
$ 30,000
Inventory
40,000
Notes payable
400,000
Land
700,000
Common Stock
1,500,000
Buildings (net)
200,000
Retained Earnings
20,000
Equipment (net)
750,000
Franchise (net)
100,000
Patent (net)
10,000
Total assets
$ 1,950,000
Total liabilities and equity
$ 1,950,000
Explanation / Answer
Fair Value of Assets & Liabilities as on January 1, 2015 Assets Land 800000 Buildings 300000 Equipment 700000 Franchise 200000 Patent 400,000 Inventory 40000 Cash 150000 Total 2590000 Liabilities Accounts payable 30000 Notes Payable 400000 Total 430000 Net Assets acquired 2160000 Amount paid for take over 2300000 Goodwill to be accounted on 140000 purchase of business Book Value of Intangible Assets at December 31, 2015 1) Goodwill as acquired 140000 2) Franchise-Opening Balance 200000 Less: Amortisation for 2015 66667 write off of 1/3 rd, having life of 3 years 133333 Less: Impairment 3333 Impairment assessed after recording amortisation Year end balance 130000 3) Patents-Opening balance 400000 Less: Amortisation for 2015 100000 write off of 1/4th, having life of 4 years. Year end book value 300000 Income Statement effects of the intangible assets for the year 2015 Amortisations Franchise 66667 Patents 100000 Impairment Loss on franchise 3333 Legal expenses to defend patents 20000 Total expenses charged to Income 190000 Statement for 2015 The expenses of 800000 incurred for Development costs of new technology will be carried forward to 2016 as R & D Work in Progress Book Value of Intangible Assets at December 31, 2016 1) Goodwill - Opening Balance 140000 Less Impairment 90000 equal to difference in fair values of assets Year end balance 50000 with and without goodwill 2) Franchise-Opening Balance 130000 Less: Amortisation for 2016 65000 write off of 1/2, having balance life of 2 years Year end balance 65000 3) Patents-Opening balance 400000 Less: Amortisation for 2016 25000 write off of 1/4th for 4 months having sold on April 1. 375000 Balance as on 04.01.2016 Less: Cash received on sale 300000 Less: Loss transferred to Income 75000 statement Year end balance 0 Income Statement effects of the intangible assets for the year 2015 Amortisations Franchise 65000 Patents 25000 Loss on sale of Patent 75000 Loss on good will impairment 90000 Total expenses charged to Income 255000 Statement for 2016 Patent development expenses Opening balance 800000 Legal and other fee for registration 18000 Year end balance 818000 This will be shown under Capital Work in Progress-Intangible Assets
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