accounting assignment
whiterose2015
chapter_12_1.pptxIntangible Assets
Chapter 12
Topics you should know after today’s class
What are characteristics of intangible assets?
What are the costs to include in the initial valuation of intangible assets?
How to deal with problems associated with amortization?
How to record goodwill?
How to measure goodwill impairment?
Characteristics
Lack physical existence.
Not financial instruments.
Normally classified as long-term asset.
Common types of intangibles:
Patents
Copyrights
Franchises or licenses
Trademarks or trade names
Goodwill
Intangible Assets Issues
Recorded at cost.
Includes all costs necessary to make the intangible asset ready for its intended use.
Typical costs include:
Purchase price.
Legal fees.
Other incidental expenses.
Valuation-Purchased Intangibles
Company bought a franchise from Alexander Co. on January 1, 2013, for $400,000. The carrying amount of the franchise on Alexander’s books on January 1, 2013, was $526,600. The franchise agreement had an estimated useful life of 30 years.
Because Company must enter a competitive bidding at the end of 2015, it is unlikely that the franchise will be retained beyond 2022. What amount should be amortized for the year ended December 31, 2014?
What is amortization expense?
40,000
52,660
13,333
17,553
E12-4 Part (2)
Generally expensed.
Only capitalize direct costs incurred in developing the intangible, such as legal costs.
Companies must expense all research and development costs when incurred.
The controversy surrounding the accounting for R&D expenditures reflects a debate about whether such expenditures meet the definition of an asset. If so, then an “expense all R&D costs” policy results in overstated expenses and understated assets.
Valuation-Internally Created Intangibles
Amortization of Intangibles
Limited-Life Intangibles
Amortize by systematic charge to expense over useful life.
Credit asset account or accumulated amortization.
Useful life should reflect the periods over which the asset will contribute to cash flows.
Amortization should be cost less residual value.
Companies should evaluate the limited-life intangibles for impairment.
Indefinite-Life Intangibles
No foreseeable limit on time the asset is expected to provide cash flows.
Must test indefinite-life intangibles for impairment at least annually.
No amortization.
Amortization of Intangibles
4. Alatorre purchased the license for distribution of a popular consumer product on January 1, 2014, for $132,500. It is expected that this product will generate cash flows for an indefinite period of time. The license has an initial term of 5 years but by paying a nominal fee, Alatorre can renew the license indefinitely for successive 5year terms. What amount should be amortized for the year ended December 31, 2014?
Key question: do we amortize intangible assets with indefinite life?
E12-4 Part (4)
Marketing-related, i.e. Trademarks or trade names.
Customer-related, i.e. Customer lists, order or production backlogs
Artistic-related, i.e. Plays, literary works, musical works, pictures
Contract-related, Franchise and licensing agreements
Technology-related, Patented technology and trade secrets granted by the U.S. Patent and Trademark Office.
Goodwill.
Types of Intangible Assets
E12-10
During 2010, George Winston Corporation spent $168,890 in research and development costs. As a result, a new product called the New Age Piano was patented. The patent was obtained on October 1, 2010, and had a legal life of 20 years and a useful life of 10 years. Legal costs of $25,440 related to the patent were incurred as of October 1, 2010.
Prepare all journal entries required in 2010 and 2011 as a result of the transactions above
E12-10
On June 1, 2012, Winston spent $12,460 to successfully prosecute a patent infringement suit. As a result, the estimate of useful life was extended to 12 years from June 1, 2012. Prepare all journal entries required in 2012 and 2013.
Hint: you need to calculate amortization expense for Jan 2012 to June 2012 (before the suit) then calculate amortization expense for June 2012 to Dec 2012.
In 2014, Winston determined that a competitor’s product would make the New Age Piano obsolete and the patent worthless by December 31, 2015. Prepare all journal entries required in 2014 and 2015.
Hint: You need to get book value as of Jan 1 2014 and amortize all book value in 2014 and 2015.
Conceptually, represents the future economic benefits arising from the other assets acquired in a business combination that are not individually identified and separately recognized.
Only recorded when an entire business is purchased.
Goodwill is measured as the excess of .
cost of the purchase over the FMV of the identifiable net assets (assets less liabilities) purchased.
Internally created goodwill should not be capitalized.
Goodwill
Multi-Diversified, Inc. decides that it needs a parts division to supplement its existing tractor distributorship. The president of Multi-Diversified is interested in buying Tractorling Company. The illustration presents the statement of financial position of Tractorling Company.
Illustration
Multi-Diversified investigates Tractorling’s underlying assets to determine their fair values.
Tractorling Company decides to accept Multi-Diversified’s offer of $400,000. What is the value of the goodwill, if any?
Illustration
Illustration
Use fair value to record all identifiable assets.
The difference between purchase price and FV of net identifiable assets is goodwill.
Cash 25,000
Accounts Receivables 35,000
Inventory 122,000
Property, Plant, and Equipment 205,000
Patents 18,000
Goodwill 50,000
Liabilities 55,000
Cash 400,000
Recording Goodwill
Fred Moss, owner of Moss Interiors, is negotiating for the purchase of Zweifel Galleries. The balance sheet of Zweifel is given in an abbreviated form below.
E12-12
Same as impairment for long-lived assets in Chapter 11.
If the sum of the expected future net cash flows (undiscounted) is less than the carrying amount of the asset, an impairment has occurred (recoverability test).
The impairment loss is the amount by which the carrying amount of the asset exceeds the fair value of the asset (fair value test).
The loss is reported as part of income from continuing operations, “Other expenses and losses” section.
Impairment of Limited-Life Intangibles
Other than Goodwill
Should be tested for impairment at least annually.
Impairment test is a fair value test.
If the fair value of asset is less than the carrying amount, an impairment loss is recognized for the difference.
Recoverability test is not used.
Impairment of Indefinite-Life Intangibles
Two Step Process:
Step 1: If fair value is less than the carrying amount of the net assets (including goodwill), then perform a second step to determine possible impairment.
Step 2: Determine the fair value of the goodwill (implied value of goodwill) and compare to carrying amount.
Impairment of Goodwill
Kohlbuy Corporation has three divisions. It purchased one division, Pritt Products, four years ago for $2 million. Kohlbuy management is now reviewing the division for purposes of recognizing an impairment. Following tale lists the Pritt Division’s net assets, including the associated goodwill of $900,000 from the purchase.
Impairment of Goodwill
Assume that the fair value of the Pritt Division is $1,900,000.
Prepare the journal entry (if any) to record the impairment.
Step 1: The fair value of the reporting unit (1.9 million) is below its carrying value (2.4 million). Therefore, an impairment has occurred.
Step 2:
Loss on impairment 500,000
Goodwill 500,000
$ 1,900,000
1,500,000
400,000
900,000
$ (500,000)
Impairment of Goodwill
Problem 12-5
On July 31, 2014, Mexico Company paid $3,022,900 to acquire all of the common stock of Conchita Incorporated, which became a division of Mexico. Conchita reported the following balance sheet at the time of the acquisition.
It was determined at the date of the purchase that the fair value of the identifiable net assets of Conchita was $2,779,400.
Compute the amount of goodwill recognized, if any, on July 31, 2014.
606,100
243,500
849,600
No Goodwill
Over the next 6 months of operations, the newly purchased division experienced operating losses. In addition, it now appears that it will generate substantial losses for the foreseeable future. At December 31, 2014, Conchita reports the following balance sheet information
It is determined that the fair value of the Conchita Division is $1,866,000.
Determine the impairment loss, if any, to be recorded on December 31, 2014.
Problem 12-5
Frequently results in something that a company patents or copyrights such as:
new product,
process,
idea,
formula,
composition, or
literary work.
Research and development (R&D) costs are not in themselves intangible assets.
Research and development (R&D) costs
Companies must expense all research and development costs when incurred.
Fair value
Carrying amount, net of goodwill
Implied goodwill
Carrying value of goodwill
Loss on impairment
Sheet1
| Fair value | |
| Carrying amount, net of goodwill | |
| Implied goodwill | |
| Carrying value of goodwill | |
| Loss on impairment |
