Prepare
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:
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 $8,000.
Working note (1):
Compute the amortization expenses:
Prepare journal entries to record the amortization expenses as on December 31, 2016 as follows:
Date | Account Title and Explanation | Post Ref |
Debit ($) | 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 $45,000.
Working note (2):
Compute the amortization expenses:
Prepare journal entries to record the decrease in
Date | Account Title and Explanation | Post Ref |
Debit ($) | 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 $150,000.
Prepare journal entries to record the loss on impairment on
Date | Accounts Title and Explanation | Debit ($) | 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 $100,000.
Working note (3):
Compute the impairment loss:
Date | Accounts Title and Explanation | Debit ($) | 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:
Working note (5):
Compute the impairment loss:
Note:
Compute the whether the goodwill is impaired:
In this case, the company would recognize an additional impairment loss of $160,000
Working note (6):
- Compute the book value of the identifiable net assets as follows:
Particulars | Amount ($) |
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).
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