Wember Company acquired a subsidiary company on December 31, 2012, and recorded

Question

Wember Company acquired a subsidiary company on December 31, 2012, and recorded the cost of the intangible assets it acquired as follows:

The patent is being amortized by the straight-line method over an expected life of 10 years with no residual value. Amortization has been recorded for the current year. The trade name was considered to have an indefinite life.

Because of the success of the subsidiary in the past, Wember has not previously considered any of the intangible assets to be impaired. However, in 2016, because of a current recession and technological changes in the subsidiary’s industry, Wember decides to review all of its intangible assets for impairment and record any adjustments at December 31, 2016.

Wember estimates that the fair value of the patent is $42,000. The company estimates the fair value of the trade name to be $90,000 but decides that it now has a limited life of 5 years. The subsidiary company, which qualifies as a reporting unit, has a book value of $700,000, including the goodwill of $150,000. Wember estimates that the fair value of the subsidiary company is $400,000, of which it allocates 80% to the identifiable assets and liabilities.

Required:

Prepare journal entries for Wember to record the amortization expense for its intangibles at December 31, 2017.

I am having trouble figuring out the loss on impairment for the patent.

Explanation / Answer

Answer

Answer 1.

Prepare journal entries for Wember to record the impairment of its intangible assets at December 31, 2016.

Wember decides to review all of its intangible assets for impairment and record any adjustments at December 31, 2016.

Book value of Intangible assets as on December 31, 2016

Patent : $ 60000 [ $ 100,000 – ($ 100,000 *4 years/ 10 years) ]

Trade name : $ 80000

Goodwill : 150,000

1. Wember estimates that the fair value of the patent is $42,000.

Impairment charges on patent A/c Dr. $ 18000   ($ 60000 - $ 42000)

                                         To Patent A/c Cr. $ 18000

2. The company estimates the fair value of the trade name to be $90,000 but decides that it now has a limited life of 5 years.

Fair value of Trade name is greater than book value of Trade name. So there will be no impairment charges on Trade name.

3. The subsidiary company, which qualifies as a reporting unit, has a book value of $700,000, including the goodwill of $150,000.

So Goodwill: $150,000

Other assets: $ 550,000   ($700,000 - $150,000)

Wember estimates that the fair value of the subsidiary company is $400,000, of which it allocates 80% to the identifiable assets and liabilities.

Identifiable assets and liabilities: $ 320,000 ($ 400,000*0.8)

Goodwill: $ 80000 ($400,000 - $ 320,000)

Impairment Charges on Goodwill A/c Dr. $ 70,000    ($ 150,000 - $ 80000)

                                                     To Goodwill A/c Cr. $ 70,000

Answer 2

Prepare journal entries for Wember to record the amortization expense for its intangibles at December 31, 2017.

Amortisation Expense on Patent A/c Dr. $ 7000 ($ 42000/6)

                                                  To Patent A/c Cr. $ 7000

Amortisation Expense on trade name A/c Dr. $ 16000 ($ 80000/5)

                                                   To Trade name A/c Cr. $ 16000

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