Bailey Company was formed in January 2017 and is preparing its financial statements under GAAP for the first time at the end of 2019. Its general ledger at December 31, 2019, includes the following assets: Patent $120,000 Copyright 140,000 Trade name 150,000 Computer software 90,000 Start-up costs 30,000 Intellectual capital 150,000 Goodwill 90,000 As the recently hired accountant for Bailey, you have been asked to make sure that the company’s accounting for intangible assets follows GAAP. Based on your investigation, you determine the following: • The patent acquired in January 2019 has an expected life of 15 years and no residual value, and it will generate approximately equal benefits each year. • Bailey will use the copyright and trade name for the foreseeable future. • The computer software was purchased in January 2019 and is used in the Bailey’s 20 offices around the country. It is expected to be replaced with new software at the beginning of 2021. • Bailey previously capitalized the expected value of its “human resources” as intellectual capital, with a corresponding increase in additional paid-in capital. • The trade name and goodwill arose from an acquisition of a subsidiary company at the end of 2018. Because of a significant adverse change in the market, you decide that both assets are impaired. You estimate that the fair value of the trade name is $50,000. The subsidiary company, which qualifies as a reporting unit, has a book value of $500,000, including the goodwill of $90,000. You estimate that the subsidiary’s fair value is $430,000. Required: Assume no adjusting entries have been made. Prepare journal entries to provide the correct information under GAAP at the end of 2019.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

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Bailey Company was formed in January 2017 and is preparing its financial statements under GAAP for the first time at the end of 2019. Its general ledger at December 31, 2019, includes the following assets:

Patent	$120,000
Copyright	140,000
Trade name	150,000
Computer software	90,000
Start-up costs	30,000
Intellectual capital	150,000
Goodwill	90,000

As the recently hired accountant for Bailey, you have been asked to make sure that the company’s accounting for intangible assets follows GAAP. Based on your investigation, you determine the following:

•	The patent acquired in January 2019 has an expected life of 15 years and no residual value, and it will generate approximately equal benefits each year.
•	Bailey will use the copyright and trade name for the foreseeable future.
•	The computer software was purchased in January 2019 and is used in the Bailey’s 20 offices around the country. It is expected to be replaced with new software at the beginning of 2021.
•	Bailey previously capitalized the expected value of its “human resources” as intellectual capital, with a corresponding increase in additional paid-in capital.
•	The trade name and goodwill arose from an acquisition of a subsidiary company at the end of 2018. Because of a significant adverse change in the market, you decide that both assets are impaired. You estimate that the fair value of the trade name is $50,000. The subsidiary company, which qualifies as a reporting unit, has a book value of $500,000, including the goodwill of $90,000. You estimate that the subsidiary’s fair value is $430,000.

Required:

Assume no adjusting entries have been made. Prepare journal entries to provide the correct information under GAAP at the end of 2019.

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