Brief Exercise 12-1
Grouper Corporation purchases a patent from Sheridan Company on January 1, 2017, for
$46,000. The patent has a remaining legal life of 16 years. Grouper feels the patent will be useful
for 10 years.
Prepare Grouper’s journal entries to record the purchase of the patent and 2017
amortization. (Credit account titles are automatically indented when amount is entered. Do not
indent manually. If no entry is required, select "No Entry" for the account titles and enter 0
for the amounts.)
Account Titles and Explanation
Patents
Debit
Credit
46,000
Cash
46,000
(To record purchase of patents)
Amortization E
4,600
Patents
4,600
(To record amortization of patents)
Patents = ($46,000 × 1/10) = $4,600
Brief Exercise 12-2
Blue Corporation purchases a patent from Crane Company on January 1, 2017, for $41,000. The
patent has a remaining legal life of 16 years. Blue feels the patent will be useful for 10 years. Assume
that at January 1, 2019, the carrying amount of the patent on Blue’s books is $32,800. In January,
Blue spends $29,600 successfully defending a patent suit. Blue still feels the patent will be useful until
the end of 2026.
Prepare the journal entries to record the $29,600 expenditure and 2019 amortization. (Credit
account titles are automatically indented when amount is entered. Do not indent manually.
If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)
Account Titles and Explanation
Patents
Debit
29,600
Cash
29,600
(To record expenditure of patents)
Amortization E
Credit
7,800
Patents
7,800
(To record amortization expense)
Patents = [($32,800 + $29,600) × 1/8] = $7,800
Brief Exercise 12-3
Splish Brothers, Inc., spent $56,800 in attorney fees while developing the trade name of its new
product, the Mean Bean Machine.
Prepare the journal entries to record the $56,800 expenditure and the first year’s amortization, using
an 8-year life. Use the account title "Trade Names". (Credit account titles are automatically
indented when amount is entered. Do not indent manually. If no entry is required, select
"No Entry" for the account titles and enter 0 for the amounts.)
Account Titles and Explanation
Trade Names
Debit
Credit
56,800
Cash
56,800
(To record expenditure of trade names)
Amortization E
7,100
Trade Names
7,100
(To record amortization expense)
Trade Names = ($56,800 × 1/8) = $7,100
Brief Exercise 12-4
Bramble Corporation obtained a franchise from Sonic Hedgehog Inc. for a cash payment of $67,200 on
April 1, 2017. The franchise grants Bramble the right to sell certain products and services for a period
of 6 years.
Prepare Bramble’s April 1 journal entry and December 31 adjusting entry. (Credit account titles are
automatically indented when amount is entered. Do not indent manually. Record journal
entries in the order presented in the problem. If no entry is required, select "No Entry" for
the account titles and enter 0 for the amounts.)
Date
Apr. 1
Account Titles and Explanation
Franchises
Cash
Debit
Credit
67,200
67,200
Dec. 31
Amortization E
8,400
Franchises
8,400
Dec. 31. Franchises = ($67,200 × 1/6 × 9/12) = $8,400
Brief Exercise 12-5
On September 1, 2017, Bramble Corporation acquired Aumont Enterprises for a cash payment of
$700,000. At the time of purchase, Aumont’s balance sheet showed assets of $580,000, liabilities of
$250,000, and owners’ equity of $330,000. The fair value of Aumont’s assets is estimated to be
$750,000.
Compute the amount of goodwill acquired by Bramble.
Value assigned to goodwill
$
200,000
Purchase price
Fair value of assets
Fair value of liabilities
$700,000
$750,000
250,000
Fair value of net assets
Value assigned to goodwill
500,000
$200,000
Brief Exercise 12-6
Martinez Corporation owns a patent that has a carrying amount of $310,000. Martinez expects future
net cash flows from this patent to total $250,000. The fair value of the patent is $160,000.
Prepare Martinez’s journal entry to record the loss on impairment. (Credit account titles are
automatically indented when amount is entered. Do not indent manually. If no entry is
required, select "No Entry" for the account titles and enter 0 for the amounts.)
Account Titles and Explanation
Loss on Impair
Debit
Credit
150,000
Patents
150,000
Patents = ($310,000 – $160,000) = $150,000
Note: An impairment has occurred because expected net future cash flow ($250,000) are less than
the carrying amount ($310,000). The loss is measured as the difference between the carrying amount
and fair value ($160,000).
Brief Exercise 12-7
Ayayai Corporation purchased Johnson Company 3 years ago and at that time recorded goodwill of
$300,000. The Johnson Division’s net assets, including the goodwill, have a carrying amount of
$600,000. The fair value of the division is estimated to be $750,000.
Prepare Ayayai journal entry to record impairment of the goodwill. (Credit account titles are
automatically indented when amount is entered. Do not indent manually. If no entry is
required, select "No Entry" for the account titles and enter 0 for the amounts.)
Account Titles and Explanation
No Entry
Debit
Credit
0
No Entry
0
Because the fair value of the division exceeds the carrying amount of the assets, goodwill is not
considered to be impaired. No entry is necessary.
Brief Exercise 12-8
Concord Corporation purchased Johnson Company 3 years ago and at that time recorded goodwill of
$330,000. The Johnson Division’s net assets, including the goodwill, have a carrying amount of
$700,000. The fair value of the division is estimated to be $668,000 and the implied goodwill is
$298,000.
Prepare Concord journal entry to record impairment of the goodwill. (Credit account titles are
automatically indented when amount is entered. Do not indent manually. If no entry is
required, select "No Entry" for the account titles and enter 0 for the amounts.)
Account Titles and Explanation
Loss on Impair
Goodw ill
Debit
Credit
32,000
32,000
Loss on Impairment = ($330,000 – $298,000) = $32,000
The fair value of the reporting unit ($668,000) is less than the carrying value ($700,000)—an
impairment has occurred. The loss is the difference between the recorded goodwill and the implied
goodwill.
Brief Exercise 12-9
Shamrock Industries had one patent recorded on its books as of January 1, 2017. This patent had a
book value of $316,800 and a remaining useful life of 8 years. During 2017, Shamrock incurred
research and development costs of $93,000 and brought a patent infringement suit against a
competitor. On December 1, 2017, Shamrock received the good news that its patent was valid and
that its competitor could not use the process Shamrock had patented. The company incurred
$119,000 to defend this patent. At what amount should patent(s) be reported on the December 31,
2017, balance sheet, assuming monthly amortization of patents?
The amount to be reported
$
394,800
Carrying Life in Amortization
Months
Amount Months
Per Month
Amortization
Patent (1/1/17)
Legal costs (12/1/17)
$316,800
96
$3,300
12
119,000
85
$1,400
1
$435,800
Carrying amount
$435,800
Less: Amortization of patent
(12 × $3,300)
Legal costs amortization (1 × $1,400)
Carrying amount 12/31/17
(39,600)
(1,400)
$394,800
Brief Exercise 12-10
Splish Brothers Industries acquired two copyrights during 2017. One copyright related to a textbook
that was developed internally at a cost of $16,000. This textbook is estimated to have a useful life
of 4 years from September 1, 2017, the date it was published. The second copyright (a history
research textbook) was purchased from University Press on December 1, 2017, for $42,000. This
textbook has an indefinite useful life.
How should these two copyrights be reported on Splish Brothers’s balance sheet as of December 31,
2017?
$
Copyright No. 1
0
Copyright No. 2
42,000
$
Should not be reported on Balance Sheet
Should be reported on Balance Sheet
Copyright No. 1 for $16,000 should be expensed and therefore not reported on the balance sheet.
Copyright No. 2 for $42,000 should be capitalized. Because the useful life is indefinite, copyright No.
2 should be tested at least annually for impairment using a fair value test. It would be reflected on
the December 31, 2017 balance sheet at its cost of $42,000.
Brief Exercise 12-11
Pina Corporation commenced operations in early 2017. The corporation incurred $58,730 of costs such
as fees to underwriters, legal fees, state fees, and promotional expenditures during its formation.
Prepare journal entries to record the $58,730 expenditure and 2017 amortization, if any. (Credit
account titles are automatically indented when amount is entered. Do not indent manually.
If no entry is required, select "No entry" for the account titles and enter 0 for the amounts.)
Account Titles and Explanation
Organization E
Debit
Credit
58,730
Cash
58,730
(To record organization expense)
No Entry
0
No Entry
0
(To record amortization expense)
Brief Exercise 12-12
Concord Corporation incurred the following costs in 2017.
Cost of laboratory research aimed at discovery of new knowledge
Cost of testing in search for product alternatives
$135,000
110,000
Cost of engineering activity required to advance the design of a
product to the manufacturing stage
258,000
$503,000
Prepare the necessary 2017 journal entry or entries for Concord. (Credit account titles are
automatically indented when amount is entered. Do not indent manually. If no entry is
required, select "No Entry" for the account titles and enter 0 for the amounts.)
Account Titles and Explanation
Research and
Debit
Credit
503,000
Cash
503,000
Brief Exercise 12-13
Indicate whether the following items are capitalized or expensed in the current year.
(a) Purchase cost of a patent from a competitor.
Capitalize
(b) Research and development costs.
Expense
(c) Organizational costs.
Expense
(d) Costs incurred internally to create goodwill.
Expense
Exercise 12-1
Presented below is a list of items that could be included in the intangible assets section of the balance
sheet.
(a)
Indicate which items on the list below would generally be reported as intangible assets in the balance
sheet.
Reported as
1. Investment in a subsidiary company.
Not an Intangible Asset
2. Timberland.
3.
Cost of engineering activity required to advance the design of a
product to the manufacturing stage.
Not an Intangible Asset
Not an Intangible Asset
4. Lease prepayment (6 months’ rent paid in advance).
Not an Intangible Asset
5. Cost of equipment obtained.
Not an Intangible Asset
6. Cost of searching for applications of new research findings.
Not an Intangible Asset
7. Costs incurred in the formation of a corporation.
Not an Intangible Asset
8. Operating losses incurred in the start-up of a business.
Not an Intangible Asset
9. Training costs incurred in start-up of new operation.
Not an Intangible Asset
10. Purchase cost of a franchise.
Intangible Asset
11. Goodwill generated internally.
Not an Intangible Asset
12. Cost of testing in search for product alternatives.
Not an Intangible Asset
13. Goodwill acquired in the purchase of a business.
Intangible Asset
14. Cost of developing a patent.
Not an Intangible Asset
15. Cost of purchasing a patent from an inventor.
Intangible Asset
16. Legal costs incurred in securing a patent.
Intangible Asset
17. Unrecovered costs of a successful legal suit to protect the patent.
Intangible Asset
18. Cost of conceptual formulation of possible product alternatives.
Not an Intangible Asset
19. Cost of purchasing a copyright.
Intangible Asset
20. Research and development costs.
Not an Intangible Asset
21. Long-term receivables.
Not an Intangible Asset
22. Cost of developing a trademark.
Not an Intangible Asset
23. Cost of purchasing a trademark.
Intangible Asset
Exercise 12-4
Presented below is selected information for Wildhorse Company.
Answer the questions asked about each of the factual situations.
1. Wildhorse purchased a patent from Vania Co. for $1,310,000 on January 1, 2015. The patent is
being amortized over its remaining legal life of 10 years, expiring on January 1, 2025. During 2017,
Wildhorse determined that the economic benefits of the patent would not last longer than 6 years
from the date of acquisition. What amount should be reported in the balance sheet for the patent, net
of accumulated amortization, at December 31, 2017?
The amount to be reported
$
786,000
2. Wildhorse bought a franchise from Alexander Co. on January 1, 2016, for $300,000. The carrying
amount of the franchise on Alexander’s books on January 1, 2016, was $450,000. The franchise
agreement had an estimated useful life of 30 years. Because Wildhorse must enter a competitive
bidding at the end of 2018, it is unlikely that the franchise will be retained beyond 2025. What amount
should be amortized for the year ended December 31, 2017?
$
The amount to be amortized
30,000
3. On January 1, 2017, Wildhorse incurred organization costs of $250,000. What amount of
organization expense should be reported in 2017?
The amount to be reported
$
250,000
4. Wildhorse purchased the license for distribution of a popular consumer product on January 1, 2017,
for $161,000. 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, Wildhorse can renew the license
indefinitely for successive 5-year terms. What amount should be amortized for the year ended
December 31, 2017?
The amount to be amortized
$
0
1. Wildhorse should report the patent at $786,000 (net of $524,000 accumulated amortization) on
the balance sheet. The computation of accumulated amortization is as follows.
Amortization for 2015 and 2016
= ($1,310,000/10) × 2
2017 amortization:
= ($1,310,000 – $262,000) ÷ (6 – 2)= 262,000
Accumulated amortization, 12/31/17
= $262,000
$524,000
2. Wildhorse should amortize the franchise over its estimated useful life. Because it is uncertain that
Wildhorse will be able to retain the franchise at the end of 2025, it should be amortized over 10 years.
The amount of amortization on the franchise for the year ended December 31, 2017, is $30,000:
($300,000/10).
3. These costs should be expensed as incurred. Therefore $250,000 of organization expense is
reported in income for 2017.
4. Because the license can be easily renewed (at nominal cost), it has an indefinite life. Thus, no
amortization will be recorded. The license will be tested for impairment in future periods.
Exercise 12-11
Fred Moss, owner of Moss Interiors, is negotiating for the purchase of Sheridan Galleries. The balance
sheet of Sheridan is given in an abbreviated form below.
SHERIDAN GALLERIES
BALANCE SHEET
AS OF DECEMBER 31, 2017
Assets
Liabilities and Stockholders’ Equity
Cash
$117,000
Land
71,200
Buildings (net)
201,200
Equipment (net)
176,200
Copyrights (net)
31,200
Total assets
Accounts payable
$49,900
Notes payable (long-term)
302,300
Total liabilities
Common stock
Retained earnings
$596,800
Total liabilities and stockholders’ equity
352,200
$209,700
34,900
244,600
$596,800
Moss and Sheridan agree that:
1. Land is undervalued by $44,700.
2. Equipment is overvalued by $5,300.
Sheridan agrees to sell the gallery to Moss for $381,400.
Prepare the entry to record the purchase of Sheridan Galleries on Moss’s books. (Credit account
titles are automatically indented when amount is entered. Do not indent manually. If no
entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)
Account Titles and Explanation
Debit
Cash
117,000
Land
115,900
Buildings
201,200
Equipment
170,900
Credit
Copyrights
31,200
Goodw ill
97,400
Accounts Pay
49,900
Long-term Not
302,300
Cash
381,400
Net assets of Sheridan as reported
($596,800 – $352,200)
$244,600
Adjustments to fair value
Increase in land value
44,700
Decrease in equipment value
(5,300)
Net assets of Sheridan at fair value
39,400
284,000
Selling price
381,400
Amount of goodwill to be recorded
$97,400
Exercise 12-13
Exercise 12-13
Presented below is information related to copyrights owned by Wildhorse Company at December 31,
2017.
$8,620,000
Cost
Carrying amount
4,330,000
Expected future net cash flows
3,900,000
Fair value
3,300,000
Assume that Wildhorse Company will continue to use this copyright in the future. As of December 31,
2017, the copyright is estimated to have a remaining useful life of 10 years.
Prepare the journal entry to record the impairment of the asset at December 31, 2017. The company
does not use accumulated amortization accounts. (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.)
Account Titles and Explanation
Loss on Impair
Copyrights
Debit
Credit
1,030,000
1,030,000
Carrying amount
Fair value
$4,330,000
3,300,000
Loss on impairment $1,030,000
Note: Asset fails recoverability test.
Prepare the journal entry to record amortization expense for 2018 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.)
Account Titles and Explanation
Amortization E
Debit
Credit
330,000
Copyrights
330,000
New carrying amount
$3,300,000
Useful life
÷ 10 years
Amortization per year
$330,000
The fair value of the copyright at December 31, 2018, is $3,690,000. Prepare the journal entry
necessary to record the increase in fair value. (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.)
Account Titles and Explanation
No Entry
Debit
Credit
0
No Entry
0
No entry is necessary. Restoration of any impairment loss is not permitted for assets held for use.
Exercise 12-14
Presented below is net asset information related to the Larkspur Division of Santana, Inc.
LARKSPUR DIVISION
NET ASSETS
AS OF DECEMBER 31, 2017
(IN MILLIONS)
Cash
$74
Accounts receivable
207
Property, plant, and equipment (net)
Goodwill
Less: Notes payable
2,618
203
(2,613)
Net assets
$489
The purpose of the Larkspur Division is to develop a nuclear-powered aircraft. If successful, traveling
delays associated with refueling could be substantially reduced. Many other benefits would also occur.
To date, management has not had much success and is deciding whether a write-down at this time is
appropriate. Management estimated its future net cash flows from the project to be $410 million.
Management has also received an offer to purchase the division for $335 million. All identifiable
assets’ and liabilities’ book and fair value amounts are the same.
Prepare the journal entry to record the impairment at December 31, 2017. (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.)
Account Titles and Explanation
Loss on Impair
Debit
Credit
154,000,000
Goodw ill
154,000,000
The fair value of the reporting unit ($335 million) is below its carrying value ($489 million). Therefore,
an impairment has occurred. To determine the impairment amount, we first find the implied goodwill.
We then compare this implied fair value to the carrying value of the goodwill to determine the amount
of the impairment to record.
Fair value of division
$335,000,000
Carrying amount of division, net of goodwill
Implied value of goodwill
286,000,000
49,000,000
Carrying value of goodwill
(203,000,000)
Loss on impairment
$154,000,000
*($489,000,000 – $203,000,000)
At December 31, 2018, it is estimated that the division’s fair value increased to $348 million. Prepare
the journal entry to record this increase in fair value. (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.)
Account Titles and Explanation
No Entry
No Entry
Debit
Credit
0
0
No entry necessary. After a goodwill impairment loss is recognized, the adjusted carrying amount of
the goodwill is its new accounting basis. Subsequent reversal of previously recognized impairment
losses is not permitted under FASB ASC 350-30-35.
Exercise 12-16
Wildhorse Company from time to time embarks on a research program when a special project seems
to offer possibilities. In 2016, the company expends $325,000 on a research project, but by the end of
2016 it is impossible to determine whether any benefit will be derived from it.
The project is completed in 2017, and a successful patent is obtained. The R&D costs to complete the
project are $115,000. The administrative and legal expenses incurred in obtaining patent number 4721001-84 in 2017 total $17,000. The patent has an expected useful life of 5 years. Record these costs
in journal entry form. Also, record patent amortization (full year) in 2017. (Credit account titles are
automatically indented when amount is entered. Do not indent manually. If no entry is
required, select "No Entry" for the account titles and enter 0 for the amounts.)
Account Titles and Explanation
Research and
Debit
Credit
115,000
Cash
115,000
(To record research and development costs)
Patents
17,000
Cash
17,000
(To record legal and administrative costs)
Amortization E
3,400
Patents
3,400
(To record one year’s amortization expense)
Patents = ($17,000 ÷ 5) = $3,400
In 2018, the company successfully defends the patent in extended litigation at a cost of $48,000,
thereby extending the patent life to December 31, 2025. What is the proper way to account for this
cost? Also, record patent amortization (full year) in 2018. (Credit account titles are automatically
indented when amount is entered. Do not indent manually. If no entry is required, select
"No Entry" for the account titles and enter 0 for the amounts.)
Account Titles and Explanation
Patents
Debit
Credit
48,000
Cash
48,000
(To record legal cost of successfully defending patent)
Amortization E
7,700
Patents
7,700
(To record one year’s amortization)
The cost of defending the patent is capitalized because the defense was successful and because it
extended the useful life of the patent.
Expense:
$17,000 – $3,400 = $13,600;
$13,600 ÷ 8
= $1,700
$48,000 ÷ 8
=
Amortization expense for 2018
6,000
$7,700
Question 1
On July 31, 2017, Sandhill Company paid $2,850,000 to acquire all of the common stock of Conchita
Incorporated, which became a division of Sandhill. Conchita reported the following balance sheet at
the time of the acquisition.
Current assets
$750,000
Noncurrent assets
Total assets
Current liabilities
$600,000
2,550,000
Long-term liabilities
500,000
$3,300,000
Stockholders’ equity
2,200,000
Total liabilities and stockholders’ equity
$3,300,000
It was determined at the date of the purchase that the fair value of the identifiable net assets of
Conchita was $2,645,000. 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, 2017, Conchita reports the following balance sheet
information.
Current assets
$430,000
Noncurrent assets (including goodwill recognized in purchase)
2,260,000
Current liabilities
(680,000)
Long-term liabilities
(480,000)
Net assets
$1,530,000
It is determined that the fair value of the Conchita Division is $1,850,000. The recorded amount for
Conchita’s net assets (excluding goodwill) is the same as fair value, except for property, plant, and
equipment, which has a fair value $100,000 above the carrying value.
Compute the amount of goodwill recognized, if any, on July 31, 2017.
$
The amount of goodwill
205,000
Goodwill = Excess of the cost of the division over the fair value of the identifiable assets:
$2,850,000 – $2,645,000 = $205,000
Determine the impairment loss, if any, to be recorded on December 31, 2017. (Enter negative
amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g.
(45).)
The impairment loss
$
0
No impairment loss is recorded, because the fair value of Conchita ($1,850,000) is greater than
carrying value of the net assets ($1,530,000).
Assume that fair value of the Conchita Division is $1,489,000 instead of $1,850,000. Determine the
impairment loss, if any, to be recorded on December 31, 2017. (Enter negative amounts using
either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)
The impairment loss
$
-141,000
Computation of impairment:
Implied fair value of goodwill = Fair value of division less the carrying value of the division (adjusted
for fair value changes), net of goodwill:
Fair value of Conchita division
Carrying value of division
$1,489,000
$1,530,000
Increase in fair value of PP&E
100,000
Less: Goodwill
205,000
(1,425,000)
Implied fair value of goodwill
64,000
Carrying value of goodwill
(205,000)
Impairment loss
($141,000)
Prepare the journal entry to record the impairment loss, if any, and indicate where the loss would be
reported in the income statement. (Credit account titles are automatically indented when
amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the
account titles and enter 0 for the amounts.)
Account Titles and Explanation
Loss on Impair
Goodw ill
Debit
Credit
141,000
141,000
This loss will be reported in income as a separate line item before the subtotal
Income From Continuing Operations
.
This loss will be reported in income as a separate line item before the subtotal “income from
continuing operations.”