Wember Company acquired a subsidiary company on December 31, 2012, and recorded the cost of the intangible assets it acquired as follows: Patent $100,000 Trade name 80,000 Goodwill 150,000 The patent is being amortized by the straight-line method over an expected life of 10 years with no residual value. Amortization has been recorded for the current year. The trade name was considered to have an indefinite life. Because of the success of the subsidiary in the past, Wember has not previously considered any of the intangible assets to be impaired. However, in 2016, because of a current recession and technological changes in the subsidiary’s industry, Wember decides to review all of its intangible assets for impairment and record any adjustments at December 31, 2016. Wember estimates that the fair value of the patent is $42,000. The company estimates the fair value of the trade name to be $90,000 but decides that it now has a limited life of 5 years. The subsidiary company, which qualifies as a reporting unit, has a book value of $700,000, including the goodwill of $150,000. Wember estimates that the fair value of the subsidiary company is $400,000, of which it allocates 80% to the identifiable assets and liabilities. Required: 1. Prepare journal entries for Wember to record the impairment of its intangible assets at December 31, 2016. 2. Prepare journal entries for Wember to record the amortization expense for its intangibles at December 31, 2017.
Cost of Intangible Assets Acquired 31 Dec, 2012: | useful life | Amortization | ||
Patent | $100,000 | 10 years | $10,000 | |
Trade Name | $80,000 | In defined life | ||
Goodwill | $150,000 | |||
Working: Amortization of patent every year at straight line method. | ||||
Cost of Patent | $100,000 | |||
Expected life | 10 years | |||
Residual value | 0 | |||
Patent will be amortized equally for 10 years | ||||
Amortization cost each year | = (Cost-Residual Value)/ Expected Life | |||
=$100000/10 | ||||
=$10000 | ||||
Book Value of Patent as on 31 Dec, 2016 | ||||
Cost -Accumulated Amortization Expense | ||||
= $100000- $40000 | ||||
= $60000 | ||||
1 | Calculation of Impairment Loss on Patent as on 31 Dec, 2016 | |||
Book Value | $60,000 | |||
Fair Value | $42,000 | |||
Therefore Impairment Loss | =60000-42000 | |||
[Book Value- Fair Value] | =$18000 | |||
2 | Calculation of Impairment Loss on Trade Mark as on 31 Dec, 2016 | |||
Cost of Trade Mark | $80,000 | |||
Fair Value | $90,000 | |||
Impairment Loss | = Cost - Fair Value | |||
Since Fair Value is more than the cost there is No Impairment Loss. | ||||
3 | Calculation of Impairment Loss on Goodwill as on 31 Dec, 2016 | |||
Book value (including goodwill | $700,000 | |||
of $150000) | ||||
fair value | $400,000 | |||
fair value of identifiable assets | ||||
and liabilities (80%) | $ 320,000 | |||
Implied fair value of goodwill | $80,000 | |||
[400000-320000] | ||||
Impairment on Goodwill | =$150000-$80000 | |||
[Book Value - Fair Value] | =$70000 | |||
4 | Calculation of Impairment Loss on Subsidiary Company as on 31 Dec, 2016 | |||
Book value of subsidiary Co. Net Assets | $550,000 | |||
[$700000-$150000 Goodwill] | ||||
Fair Value of Identified Net Assets | $320,000 | |||
Impairment Loss on Subsidiary Co. | $230,000 | |||
[Book Value - Fair Value | ||||
Journal Entries for year ending 31 Dec, 2016 | ||||
1 | Loss on Impairment | $318,000 | ||
Patent | $18,000 | |||
TradeMark | 0 | |||
Goodwill | $70,000 | |||
Subsidiary Co. | $230,000 | |||
Impairment loss on all assets recorded | ||||
Part 2 | Amortization Expense for Patent for Year Ending 31 Dec, 2017 | |||
Book Value of Patent as on 31 Dec,17 | $42,000 | |||
Expected life | 10 years from 2012 | |||
Remaining Expected Life | 6 years | |||
Amortization Expense Straight Line | = 42000/6 Years | |||
= $7000 | ||||
Amortization Expense for Trademark for Year Ending 31 Dec, 2017 | ||||
Book Value | $80,000 | |||
Expected Life | 5 Years | |||
Amortization Expense Straight Line | = 80000/5 years | |||
= $16000 | ||||
[Here book value of Trademark has not been increased to fair value because of | ||||
accounting principles only reduction in book value is recorded not increase] | ||||
Journal Entry for the Year Ending 31 Dec, 2017 | ||||
Amortization Expense | $23,000 | |||
Patent | $7,000 | |||
Trade Mark | $16,000 | |||
Amortization Expense for all assets recorded. | ||||
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