Chapter 13 - SFAS Nos.

141 & 142

Chapter 13
End-of-Chapter Material Relating to SFAS Nos. 141 and 142

QUESTIONS:

1. Briefly describe the three types of intangible assets in terms of amortization and
impairment.
2. Briefly describe the four procedures followed in testing goodwill for impairment.

PRACTICE 1 RECORDING AMORTIZATION EXPENSE

On January 1 the company purchased the rights to a valuable Internet domain name
for $300,000. Given current market conditions, the company estimates that these
rights have an economic life of five years at which time they will have no residual
value. Make the journal entry necessary to recognize amortization expense for the
year.

PRACTICE 2 GOODWILL IMPAIRMENT

Buyer Company acquired Target Company on January 1. As part of the acquisition,

$1,000 in goodwill was recognized; this goodwill was assigned to Buyers
Manufacturing reporting unit. On December 31, it was estimated that the future cash
flows expected to be generated by the Manufacturing reporting unit are $350 at the
end of each year for the next 10 years. The appropriate interest rate is 10%. The fair
values and book values of the assets and liabilities of the Manufacturing reporting
unit are as follows:
Book Fair
Values Values
Identifiable Assets $3,500 $4,000
Goodwill 1,000 ???
Liabilities 2,000 2,000

Make the journal entry necessary to recognize any goodwill impairment loss.

EXERCISE 1 ACCOUNTING FOR PATENTS

The Deep South Co. applied for and received numerous patents at a total cost of
$30,345 at the beginning of 2000. It is assumed the patents will be evenly useful
during their full legal life. At the beginning of 2002, the company paid $7,875 in
successfully prosecuting an attempted infringement of these patent rights. At the
beginning of 2005, $25,200 was paid to acquire patents that could make its own
patents worthless; the patents acquired have a remaining life of 15 years but will
not be used.
1. Give the entries to record the expenditures relative to patents.
2. Give the entries to record patent amortization for the years 2000, 2002, and
2005.

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EXERCISE 2 IMPAIRMENT OF INTANGIBLES

An intangible asset cost $300,000 on January 1, 2005. On January 1, 2006, the
asset was evaluated to determine whether it was impaired. As of January 1,
2006, the asset was expected to generate future cash flows of $25,000 per year
(at the end of the year). The appropriate discount rate is five percent.
1. Give the entries to record amortization in 2005 and any impairment loss in
2006 assuming that as of January 1, 2005 the asset was assumed to have a
total useful life of 10 years and that as of January 1, 2006 there were nine
years remaining.
2. Give the entries to record amortization in 2005 and any impairment loss in
2006 assuming that as of January 1, 2005 the asset was assumed to have an
indefinite useful life and that as of January 1, 2006 the remaining life was
still indefinite.

EXERCISE 3 IMPAIRMENT OF GOODWILL

Big Company acquired Small Company on January 1. As part of the acquisition,
$5,000 in goodwill was recognized; this goodwill was assigned to Bigs Internet
Applications reporting unit. During the year, the Internet Applications reporting
unit reported revenues of $8,000. Publicly-traded companies with operations
similar to those of the Internet Applications unit had price-to-revenue ratios
averaging 1.70. The fair values and book values of the assets and liabilities of
the Internet Applications reporting unit are as follows:

Book Fair
Values Values
Identifiable Assets $19,500 $19,000
Goodwill 5,000 ???
Liabilities 6,500 6,500

Make the journal entry necessary to recognize any goodwill impairment loss.

PROBLEM 1 ACCOUNTING FOR PATENTS

On January 3, 1997, the Masterson Company spent $96,000 to apply for and
obtain a patent on a newly developed product. The patent had an estimated
useful life of 10 years. At the beginning of 2001, the company spent $18,000 in
successfully prosecuting an attempted infringement of the patent. At the
beginning of 2002, the company purchased for $40,000 a patent that was
expected to prolong the life of its original patent by 5 years. On July 1, 2005, a
competitor obtained rights to a patent that made the companys patent obsolete.
Instructions: Give all the entries that would be made relative to the patent for
the period 19972005, including entries to record the purchase of the patent,
annual patent amortization, and ultimate patent obsolescence. (Assume the
companys accounting period is the calendar year.)

PROBLEM 2 INTANGIBLE IMPAIRMENT

On December 31, 2004, Magily Company acquired the following three
intangible assets:

a. A trademark for $30,000. The trademark has seven years remaining in its
legal life. It is anticipated that the trademark will be renewed in the future,
indefinitely, without problem.

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b. Goodwill for $150,000. The goodwill is associated with Magilys Abacus

Manufacturing reporting unit.
c. A customer list for $22,000. By contract, Magily has exclusive use of the
list for five years. Because of market conditions, it is expected that the list
will have economic value for just three years.

On December 31, 2005, before any adjusting entries for the year were made, the
following information was assembled about each of the intangible assets:

a. Because of a decline in the economy, the trademark is now expected to

generate cash flows of just $1,000 per year. The useful life of the trademark
still extends beyond the foreseeable horizon.
b. The cash flows expected to be generated by the Abacus Manufacturing
reporting unit are $25,000 per year for the next 22 years. Book values and
fair values of the assets and liabilities of the Abacus Manufacturing
reporting unit are as follows:
Book Fair
Values Values
Identifiable Assets $270,000 $300,000
Goodwill 150,000 ???
Liabilities 180,000 180,000

c. The cash flows expected to be generated by the customer list are $12,000 in
2006 and $8,000 in 2007.

Instructions: The appropriate discount rate for all items is six percent. Make all
journal entries necessary on December 31, 2005 in connection with these three
intangible assets.