Intermediate Accounting: Reporting and Analysis
Intermediate Accounting: Reporting and Analysis
2nd Edition
ISBN: 9781285453828
Author: James M. Wahlen, Jefferson P. Jones, Donald Pagach
Publisher: Cengage Learning
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Chapter 12, Problem 6P

1.

To determine

Prepare journal entries to record the impairment of intangible assets of Company W at December 31, 2016.

1.

Expert Solution
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Explanation of Solution

Impairment: Impairment refers to the decrease in the value of long-lived assets due to obsolescence, damage. If the remaining book value of a plant asset could not be recovered from the future cash flows expected to be generated from the use of the asset, the value of the plant asset is said to be impaired. When the long-lived asset is impaired, then the future cash flows expected to be generated from the use of the asset is less than the current book value of the asset.

Prepare journal entries to record the impairment of intangible assets of Company W at December 31, 2016 as follows:

Loss on impairment of patent:

DateAccounts Title and ExplanationPost Ref.Debit ($)Credit ($)
December 31, 2016Loss on impairment-Patent (3) 18,000 
 Patent  18,000
 (To record the impairment loss of patent)   

Table (1)

  • Loss on impairment-patent is an expense account and it decreases the equity value. Hence, debit the loss on impairment account with $18,000.
  • Patent is an asset account and it is decreased. Therefore, credit the patent account with $18,000.

Working note (1):

Calculate the accumulated depreciation for 4 years.

Accumulated depreciation = Cost of aquisationUseful life×Depreciation incurred=$100,00010 years×4 years=$40,000

Working note (2):

Calculate the book value of patent.

Book value of patent = (Cost of patent as on 2015Accumulated depreciation)=$100,000$40,000(1)=$60,000

Working note (3):

Calculate the impairment loss of patent.

Impairment loss = Fair valueBook value=$42,000$60,000(3)=($18,000)

Loss on impairment of tradename:

In this case, trade name is not impaired, because the fair value of trade name is higher than the original cost. At the same time, GAAP does not allow revaluation of intangible assets as a result the carrying value of the trade name is not increased.

Loss on impairment of goodwill:

In this case, the fair value of subsidiary company ($400,000) is greater than its carrying value ($150,000). Hence, company W must perform two step quantitative impairment tests.

  1. 1. If the fair value of subsidiary company ($400,000) is not greater than the book value ($750,000), then company W should perform second step of impairment test.
  2. 2. When the implied fair value of the goodwill ($80,000) is less than the carrying value of goodwill ($150,000), it indicates that Company W has recognized impairment loss on goodwill.
DateAccounts Title and ExplanationPost Ref.Debit ($)Credit ($)
December 31, 2016Impairment loss on Goodwill (5) 70,000 
 Goodwill  70,000
 (To record the impairment loss of goodwill)   

Table (2)

  • Impairment loss on goodwill is an expense account and it decreases the equity value. Hence, debit the loss on impairment account with $70,000.
  • Goodwill is an asset account and it is decreased. Therefore, credit the goodwill account with $70,000.

Working note (4):

Calculate the implied fair value of goodwill.

Implied fair value of goodwill }[Fair value of subsidiary company (Fair value of subsidiary company×Allocatedpercentage of identifiable assets and liabilities )]=$400,000($400,000×80100)=$400,000$320,000=$80,000

Working note (5):

Calculate the impairment loss of goodwill.

Impairment loss = (Implied fair value of goodwillCarrying value of goodwill)=$80,000$150,000=($70,000)

2.

To determine

Prepare journal entries to record the amortization expense of Company W for December 31, 2017.

2.

Expert Solution
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Explanation of Solution

Prepare journal entries to record the amortization expense of Company W for December 31, 2017 as follows:

Amortization expense of patent:

DateAccount Title and Explanation

Debit

($)

Credit

($)

December 31, 2017Amortization expense (6)7,000 
     Patent 7,000
 (To record the amortization expense incurred)  

Table (3)

  • Amortization expense is component of shareholders’ equity, and it decreases the value of shareholders equity. Hence, debit the amortization expense with $7,000.
  • Patent is an asset account, and it decreases the value of asset. Hence, credit the patent account with $7,000.

Working note (6):

Calculate the amortization expense of patent.

Amortization expnes = Fair value of patentRemaing useful life=$42,000(10 years4 years)=$7,000

Amortization expense of trade name:

DateAccount Title and Explanation

Debit

($)

Credit

($)

December 31, 2017Amortization expense (7)16,000 
     Trade name 16,000
 (To record the amortization expense incurred)  

Table (4)

  • Amortization expense is component of shareholders’ equity, and it decreases the value of shareholders equity. Hence, debit the amortization expense with $16,000.
  • Trade name is an asset account, and it decreases the value of asset. Hence, credit the trade name account with $16,000.

Working note (7):

Calculate the amortization expense of patent.

Amortization expnes = Cost of trade nameUseful life=$80,0005 years=$16,000

Amortization expense of goodwill:

In this case, the goodwill is not amortized during 2017.

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