12 Intangible Assets PROBLEMS 12
PROBLEMS
P12-1 (L01,2,3,5) GROUPWORK (Correct Intangible Assets Account) Reichenbach Co., organized in 2016, has set up a single account for all intangible assets. The following summary discloses the debit entries that have been recorded during 2017 and 2018…
Instructions
Prepare the necessary entries to clear the Intangible Assets account and to set up separate accounts for distinct types of intangibles.
Make the entries as of December 31, 2018, recording any necessary amortization and reflecting all balances accurately as of that date. (Ignore income tax effects.)
P12-2 (L01,2,4,5) EXCEL (Accounting for Patents) Fields Laboratories holds a valuable patent (No. 758-6002-1A) on a precipitator that prevents certain types of air pollution. Fields does not manufacture or sell the products and processes it develops. Instead, it conducts research and develops products and processes which it patents, and then assigns the patents to manufacturers on a royalty basis. Occasionally it sells a patent. The history of Fields patent number 758-6002-1A is as follows...
Instructions
Compute the carrying value of patent No. 758-6002-1A on each of the following dates:
(a) December 31, 2011.
(b) December 31, 2015.
(c) December 31, 2018.
P12-3 (L01,2,5) (Accounting for Franchise, Patents, and Trademark) Information concerning Sandro Corporation’s intangible assets is as follows.
1. On January 1, 2017, Sandro signed an agreement to operate as a franchisee of Hsian Copy Service, Inc. for an initial franchise fee of $75,000. Of this amount, $15,000 was paid when the agreement was signed, and the balance is payable in 4 annual payments of $15,000 each, beginning January 1, 2018. The agreement provides that the down payment is not refundable and no future services are required of the franchisor. The present value at January 1, 2017, of the 4 annual payments discounted at 14% (the implicit rate for a loan of this type) is $43,700. The agreement also provides that 5% of the revenue from the franchise must be paid to the franchisor annually. Sandro’s revenue from the franchise for 2017 was $900,000. Sandro estimates the useful life of the franchise to be 10 years. (Hint: You may want to refer to Chapter 18 to determine the proper accounting treatment for the franchise fee and payments.)
2. Sandro incurred $65,000 of experimental and development costs in its laboratory to develop a patent that was granted on January 2, 2017. Legal fees and other costs associated with registration of the patent totaled $17,600. Sandro estimates that the useful life of the patent will be 8 years.
3. A trademark was purchased from Shanghai Company for $36,000 on July 1, 2014. Expenditures for successful litigation in defense of the trademark totaling $10,200 were paid on July 1, 2017. Sandro estimates that the useful life of the trademark will be 20 years from the date of acquisition.
Instructions
(a) Prepare a schedule showing the intangible assets section of Sandro’s balance sheet at December 31, 2017. Show supporting computations in good form.
(b) Prepare a schedule showing all expenses resulting from the transactions that would appear on Sandro’s income statement for the year ended December 31, 2017. Show supporting computations in good form.
(AICPA adapted)
P12-4 (L03,4,5) GROUPWORK (Goodwill, Impairment) On July 31, 2017, Mexico Company paid $3,000,000 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...
Instructions
(a) Compute the amount of goodwill recognized, if any, on July 31, 2017.
(b) Determine the impairment loss, if any, to be recorded on December 31, 2017.
(c) Assume that fair value of the Conchita Division is $1,600,000 instead of $1,850,000. Determine the impairment loss, if any, to be recorded on December 31, 2017.
(d) Prepare the journal entry to record the impairment loss, if any, and indicate where the loss would be reported in the income statement.
P12-5 (L01,2,3,4) EXCEL (Comprehensive Intangible Assets) Montana Matt’s Golf Inc. was formed on July 1, 2016, when Matt Magilke purchased the Old Master Golf Company. Old Master provides video golf instruction at kiosks in shopping malls.
Magilke plans to integrate the instructional business into his golf equipment and accessory stores. Magilke paid $770,000 cash for Old Master. At the time, Old Master’s balance sheet reported assets of $650,000 and liabilities of $200,000 (thus owners’ equity was $450,000). The fair value of Old Master’s assets is estimated to be $800,000. Included in the assets is the Old Master trade name with a fair value of $10,000 and a copyright on some instructional books with a fair value of $24,000. The trade name has a remaining life of 5 years and can be renewed at nominal cost indefinitely. The copyright has a remaining life of 40 years.
Instructions
(a) Prepare the intangible assets section of Montana Matt’s Golf Inc. at December 31, 2016. How much amortization expense is included in Montana Matt’s income for the year ended December 31, 2016? Show all supporting computations.
(b) Prepare the journal entry to record amortization expense for 2017. Prepare the intangible assets section of Montana Matt’s
Golf Inc. at December 31, 2017. (No impairments are required to be recorded in 2017.)
(c) At the end of 2018, Magilke is evaluating the results of the instructional business. Due to fierce competition from online and television (e.g., the Golf Channel), the Old Master reporting unit has been losing money. Its book value is now $500,000. The fair value of the Old Master reporting unit is $420,000. The implied value of goodwill is $90,000. Magilke has collected the following information related to the company’s intangible assets.
Intangible Asset
Expected Cash Flows
(undiscounted) Fair Values
Trade names $ 9,000 $ 3,000
Copyrights 30,000 25,000
Prepare the journal entries required, if any, to record impairments on Montana Matt’s intangible assets. (Assume that any amortization for 2018 has been recorded.) Show supporting computations.
P12-6 (L02,4,5) (Accounting for R&D Costs) During 2015, Wright Tool Company purchased a building site for its proposed research and development laboratory at a cost of $60,000. Construction of the building was started in 2015. The building was completed on December 31, 2016, at a cost of $320,000 and was placed in service on January 2, 2017. The estimated useful life of the building for depreciation purposes was 20 years. The straight-line method of depreciation was to be employed, and there was no estimated residual value.
Management estimates that about 50% of the projects of the research and development group will result in long-term benefits (i.e., at least 10 years) to the corporation. The remaining projects either benefit the current period or are abandoned before completion. A summary of the number of projects and the direct costs incurred in conjunction with the research and development activities for 2017 appears below…
Upon recommendation of the research and development group, Wright Tool Company acquired a patent for manufacturing rights at a cost of $88,000. The patent was acquired on April 1, 2016, and has an economic life of 10 years.
Instructions
If generally accepted accounting principles were followed, how would the items above relating to research and development activities be reported on the following financial statements?
(a) The company’s income statement for 2017.
(b) The company’s balance sheet as of December 31, 2017.
Be sure to give account titles and amounts, and briefly justify your presentation.
(CMA adapted)
