SAR Research Associates reports the following intangible assets on its December 31 balance sheet Intangible Asset Net Carrying Value Remaining Life Franchise $860,000 5 years Patent 410,000 3 years Trade name 3,960,000 N/A Total $5,230,000 It does not use a separate accumulated amortization account for the intangible assets (i.e., it deducts the amount of amortization directly from the intangible asset account). Management provided the following information related to intangible assets it obtained during the current year: • Franchise: Due to current market conditions, products sold under the franchise have experienced significant sales declines from possible obsolescence. • Patent: SAR is currently involved in litigation that will determine whether the company has the exclusive right to sell the patented product. Legal counsel informed SAR that the value of the patent will likely be reduced. • Trade name: The company is required to test for impairment of its indefinite-life intangible assets annually. SAR's cost of capital is 4%. Management estimates the following future cash flows to be generated over the next 5 years from the use of its intangible assets: Future Period Franchise Patent Trade Name Year 1 $310,000 $290,000 $850,000 Year 2 250,000 94,500 630,000 Year 3 150,000 11,000 680,000 Year 4 47,500 0 535,000 Year 5 26,000 0 373,000 Total $783,500 $395,500 $3,068,000 Requirement: a. Compute the impairment loss (if any) for each intangible asset. b. Prepare the journal entry necessary to record the impairment loss. c. Assuming that SAR amortizes its finite-life intangible assets using the straight-line method with no scrap value prepare the journal entry to record the annual amortization for the first year subsequent to the impairment write-down.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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SAR Research Associates reports the following intangible assets on its December 31 balance sheet

Intangible Asset	Net Carrying Value	Remaining Life
Franchise		$860,000	5 years
Patent		410,000	3 years
Trade name		3,960,000	N/A
Total		$5,230,000

It does not use a separate accumulated amortization account for the intangible assets (i.e., it deducts the amount of amortization directly from the intangible asset account).

Management provided the following information related to intangible assets it obtained during the current year:

•	Franchise: Due to current market conditions, products sold under the franchise have experienced significant sales declines from possible obsolescence.
•	Patent: SAR is currently involved in litigation that will determine whether the company has the exclusive right to sell the patented product. Legal counsel informed SAR that the value of the patent will likely be reduced.
•	Trade name: The company is required to test for impairment of its indefinite-life intangible assets annually.

SAR's cost of capital is 4%. Management estimates the following future cash flows to be generated over the next 5 years from the use of its intangible assets:

Future Period	Franchise	Patent	Trade Name
Year 1	$310,000	$290,000	$850,000
Year 2	250,000	94,500	630,000
Year 3	150,000	11,000	680,000
Year 4	47,500	0	535,000
Year 5	26,000	0	373,000
Total	$783,500	$395,500	$3,068,000

Requirement:

a.	Compute the impairment loss (if any) for each intangible asset.
b.	Prepare the journal entry necessary to record the impairment loss.
c.	Assuming that SAR amortizes its finite-life intangible assets using the straight-line method with no scrap value prepare the journal entry to record the annual amortization for the first year subsequent to the impairment write-down.

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