Question

Miklos Company was formed in January 2018 and is preparing its financial statements in compliance with GAAP for the first time at the end of 2020. The company’s general ledger at December 31, 2020 includes the following balances:

Patent $120,000

Copyright 140,000

Trade Name 150,000

Computer Software 90,000

Start-up Costs 30,000

Intellectual Capital 150,000

Goodwill 90,000

As a recently hired accountant for Miklos, you have been asked to make sure that the company’s accounting for intangible assets follow GAAP. Based on your investigation, you determine the following:

a. The patent was acquired in January 2020 has an expected life of 15 years and no residual value. It is expected to generate approximately equal benefits each year.

b. Miklos will use the copyright and trade name for the foreseeable future.

c. The company software was purchased in April 2020 and is used in the Miklos’s 20 offices around the country. It is expected to be replaced with new software in April 2022.

d. Miklos previous capitalized the expected value of its “human resources” as intellectual capital, with a corresponding increase to additional paid in capital.

e. The trade name and goodwill arose from an acquisition of a subsidiary company at the end of 2019. Because of a significant adverse change in the market, you decide that both these assets are impaired. You estimate that the fair value of the trade name is $50,000. The subsidiary company, which qualifies as a reporting unit, has a book value of $500,000, including the goodwill of $90,000. You estimate the subsidiaries fair value is $300,000, of which $250,000 is allocated to its identifiable assets and liabilities.

Instructions:

1. Assuming no adjusting entries have been made, prepare the adjusting journal entries to provide the correct information at the end of 2020.

2. Determine the balance for each intangible asset that will be reported on Miklos’s December 31, 2020 Balance sheet.

3. Identify the accounts and associated amounts that would be shown of Miklos’s December 31, 2020 Income Statement under expenses.

Answer 1

Please find below table useful to compute desired results: -

D Credit =C2 A B C 1 Date Account Titles and Explanation Debit Amortization expense - Patent =120000/15 | Accumulated amortization - Patent (to record the amortization expense on patents) Amortization expense - Software =90000/2 Accumulated amortization - Software (to record the amortization expense on software) Retained Earnings =30000 Start-up costs (to record the debiting expenses to retained earnings account) Additional paid-in capital =150000 Intellectual capital (to record the correction of wrongly credited additional paid-in-capital) Long term impairment - Trade name Trade name (to record the impairment loss on trade name) Impairment loss on goodwill =-(300000-250000-90000) Goodwill (to record the impairment loss on goodwill F Balance Sheet Miklos Company as on Dec. 31, 2020 Assets: Patent =120000-D3 Copyright =140000 Trade Name =150000-D15 Computer Software =90000-D6 Start-up Costs =30000-D9 Intellectual Capital =150000-D12 Goodwill 90000-D18 =SUM(G5:611) C =C11 =C14 =C17 Income Statement Miklos Company as on Dec. 31, 2020 Expenses: Amortisation on patent =C2 Impairment of Trade Name =C14 Expense on Startup =C8 Amortisation of Computer Software =C5 Impairment of Goodwill =C17 =SUM(G18:G22)

End results would be as follows: -

А E G B C D 1 Date Account Titles and Explanation Debit | Credit Amortization expense - Patent 8.000 Accumulated amortization - Patent 8,000 (to record the amortization expense on patents) Amortization expense - Software 45,000 Accumulated amortization - Software 45,000 (to record the amortization expense on software) Retained Earnings 30,000 Start-up costs 30.000 (to record the debiting expenses to retained earnings account) Additional paid-in capital 150.000 Intellectual capital 150,000 (to record the correction of wrongly credited additional paid-in-capital) Long term impairment - Trade name | 100.000 Trade name 100,000 (to record the impairment loss on trade name) Impairment loss on goodwill 40,000 Goodwill 40.000 (to record the impairment loss on goodwill Balance Sheet Miklos Company as on Dec. 31, 2020 Assets: Patent Copyright Trade Name Computer Software Start-up Costs Intellectual Capital Goodwill 112.000 140,000 50,000 45,000 50.000 397,000 Income Statement Miklos Company as on Dec. 31, 2020 Expenses: Amortisation on patent Impairment of Trade Name Expense on Startup Amortisation of Computer Software Impairment of Goodwill 8.000 100.000 30.000 45.000 40,000 223.000