Sky Co., organized in 2020, provided you with the following information. 1. Purchased a license for $20,000 on July 1, 2020. The license gives Sky exclusive rights to sell its services in the tri-state region and will expire on July 1, 2028. 2. Purchased a patent on January 2, 2021, for $40,000. It is estimated to have a 5-year life. 3. Costs incurred to develop an exclusive Internet connection process as of June 1, 2021, were $45,000. The process has an indefinite life. 4. On April 1, 2021, Sky purchased a small circuit board manufacturer for $350,000. Goodwill recorded in the transaction was $90,000. 5. On July 1, 2021, legal fees for successful defense of the patent purchased on January 2, 2021, were $11,400. 6. Research and development costs incurred as of September 1, 2021, were $75,000. Instructions a. Prepare the journal entries to record all the entries related to the patent during 2021. b. At December 31, 2021, an impairment test is performed on the license purchased in 2020. It is estimated that the net cash flows to be received from the license will be $13,000, and its fair value is $7,000. Compute the amount of impairment, if any, to be recorded on December 31, 2021. c. What is the amount to be reported for intangible assets on the balance sheet at December 31, 2020? At December 31, 2021?

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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Sky Co., organized in 2020, provided you with the following information.

  • 1. Purchased a license for $20,000 on July 1, 2020. The license gives Sky exclusive rights to sell its services in the tri-state region and will expire on July 1, 2028.
  • 2. Purchased a patent on January 2, 2021, for $40,000. It is estimated to have a 5-year life.
  • 3. Costs incurred to develop an exclusive Internet connection process as of June 1, 2021, were $45,000. The process has an indefinite life.
  • 4. On April 1, 2021, Sky purchased a small circuit board manufacturer for $350,000. Goodwill recorded in the transaction was $90,000.
  • 5. On July 1, 2021, legal fees for successful defense of the patent purchased on January 2, 2021, were $11,400.
  • 6. Research and development costs incurred as of September 1, 2021, were $75,000.

Instructions

a. Prepare the journal entries to record all the entries related to the patent during 2021.

b. At December 31, 2021, an impairment test is performed on the license purchased in 2020. It is estimated that the net cash flows to be received from the license will be $13,000, and its fair value is $7,000. Compute the amount of impairment, if any, to be recorded on December 31, 2021.

c. What is the amount to be reported for intangible assets on the balance sheet at December 31, 2020? At December 31, 2021?

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