Chapter 12, Problem 5P

To determine

Prepare journal entries for the given transaction.

Explanation of Solution

Amortization expense: The expense which reflects the usage of intangible asset by the way of reducing the cost of the asset for the estimated useful definite life, is referred to as amortization expense.

Formula for amortization expense:

$\text{Amortization expense}=\text{Cost of intangible asset}\text{×}\frac{1}{\text{Useful life}}$

Prepare journal entries to record the amortization expenses as on December 31, 2016 as follows:

Date	Account Title and Explanation	Post Ref	Debit ($)	Credit ($)
December 31, 2016	Amortization Expense –patent (1)		8,000
	Patent			8,000
	(To record the amortization expense of patent)

Table (1)

• An amortization expenses-Patent is an expense account and it is increased by $8,000. Expenses are the component of equity and it decreases the value of equity. Therefore, debit amortization expenses account with $8,000.
• Patent is an asset, and it is decreased by $8,000. Therefore, debit patent with $8,000.

Working note (1):

Compute the amortization expenses:

$\begin{array}{c}\text{Amortization expenses}=\frac{\text{Patent}}{\left[\begin{array}{l}\text{Estimated Useful }\\ \text{Life of the patent}\end{array}\right]}\\ \text{=}\frac{\text{\$120,000}}{\text{15 years}}\\ \text{=}\text{\$8,000}\end{array}$

Prepare journal entries to record the amortization expenses as on December 31, 2016 as follows:

Date	Account Title and Explanation	Post Ref	Debit ($)	Credit ($)
December 31, 2016	Amortization Expense –Computer software (2)		45,000
	Computer software			45,000
	(To record the amortization expense of computer software)

Table (2)

• Amortization expenses-computer software is an expense account and it is increased by $45,000. Expenses are the component of equity and it decreases the value of equity. Therefore, debit amortization expenses account with $45,000.
• Computer software is an asset, and it is decreased by $45,000. Therefore, debit computer software with $45,000.

Working note (2):

Compute the amortization expenses:

$\begin{array}{c}\text{Amortization expenses}=\frac{\text{Patent}}{\left[\begin{array}{l}\text{Estimated Useful }\\ \text{Life of the patent}\end{array}\right]}\\ \text{=}\frac{\text{\$90,000}}{\text{2 years}}\\ \text{=}\text{\$45,000}\end{array}$

Prepare journal entries to record the decrease in retained earnings:

Date	Account Title and Explanation	Post Ref	Debit ($)	Credit ($)
2016	Retained earnings		30,000
	Start-Up Costs			30,000
	(To record the decrease in retained earnings)

Table (3)

• Retained is a component of stockholders’ equity. There is an increase in the value of equity. Hence, credit retained earnings account with $30,000.
• A start-up cost is an asset, and it is decreased by $30,000. Therefore, debit start-up costs account with $30,000.

Prepare journal entries to record the additional paid-in-capital that was inappropriately capitalized:

Date	Account Title and Explanation	Post Ref	Debit ($)	Credit ($)
2016	Additional Paid-in Capital		150,000
	Intellectual Capital			150,000
	(To record the increase in additional paid-in-capital)

Table (4)

• Additional Paid-in-capital is a component of stockholders’ equity. There is an increase in the value of equity. Hence, credit additional paid-in-capital with $150,000.
• Intellectual capital is an asset, and it is decreased by $150,000. Therefore, debit intellectual capital account with $150,000.

Prepare journal entries to record the loss on impairment on goodwill and trade name as follows:

Date	Accounts Title and Explanation	Debit ($)	Credit ($)
2016	Impairment Loss-Trade name (3)	100,000
	Trademark		100,000
	(To record the impairment loss)

Table (5)

• Impairment loss is an expense account, and it decreases the value of equity. Hence, debit the impairment loss by $100,000.
• Trademark is an asset (Intangible) account and it is decreased. Therefore, credit trademark account with $100,000.

Working note (3):

Compute the impairment loss:

$\begin{array}{c}\text{Impairment loss = Fair value}-\text{Book value}\\ \text{=\$50,000}-\$150,000\\ =\$(100,000)\end{array}$

Date	Accounts Title and Explanation	Debit ($)	Credit ($)
2016	Impairment Loss-Goodwill (4)	40,000
	Goodwill		40,000
	(To record the impairment loss on goodwill)

Table (6)

• Impairment loss is an expense account, and it decreases the value of equity. Hence, debit the impairment loss by $40,000.
• Trademark is an asset (Intangible) account and it is decreased. Therefore, credit trademark account with $40,000.

Working note (4):

Compute the implied fair value:

$\begin{array}{c}\text{Impairment loss =Fair value}-\text{Net identifiable assets}\\ \text{=\$300,000}-\$250,000\\ =\$50,000\end{array}$

Working note (5):

Compute the impairment loss:

$\begin{array}{c}\text{Impairment loss = Implied fair value (1)}-\text{Carrying value}\\ \text{=\$50,000}-\$90,000\\ =\$(40,000)\end{array}$

Note:

Compute the whether the goodwill is impaired:

$\begin{array}{c}\text{Impairment loss of goodwill}=\text{Fair value}-\text{Book value}\\ \text{=\$300,000}-\$500,000\\ =\$(200,000)\end{array}$

In this case, the company would recognize an additional impairment loss of $160,000$\left(\$410,000-\$250,000\right)$ on the relevant assets. Since the company has already recognized a loss of $100,000 on the trade name, it would recognize only an additional loss of $60,000$\left(\$160,000-\$100,000\right)$ on other assets that are impaired.

Working note (6):

• Compute the book value of the identifiable net assets as follows:

Particulars	Amount ($)
Book value	500,000
Less: Goodwill	90,000
Book value of the identifiable net assets	410,000

Table (7)

• The fair value of the identifiable net assets is $250,000 (Given).