Chapter 12: Q32. (page 610)
Why might a company become involved in an interest rate swap contract to receive fixed interest payments and pay variable?
A company might enter into the contract of the interest rate swap contract to set off the fixed payment of the debt obligation against the fixed payment swap.
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What are factors to be considered in estimating the useful life of an intangible asset?
Question: Kenoly Corporation owns a patent that has a carrying amount of \(300,000. Kenoly expects future net cash flows from this patent to total \)210,000 over its remaining life of 10 years. The recoverable amount of the patent is $110,000. Prepare Kenoly’s journal entry, if necessary, to record the loss on impairment.
Under what circumstances is it appropriate to record goodwill in the accounts? How should goodwill, properly recorded on the books, be written off in order to conform with generally accepted accounting principles?
Question: Indicate whether the following items are capitalized or expensed in the current year. (a) Purchase cost of a patent from a competitor. (c) Organizational costs. (b) Research and development costs. (d) Costs incurred internally to create goodwill.
Question: (Goodwill, Impairment) On July 31, 2017, Mexico Company paid \(3,000,000 to acquire all of the common stock of Conchita Incorporated, which became a division of Mexico. Conchita reported the following balance sheet at the time of the acquisition.
Current assets | \) 800,000 | Current liabilities | \( 600,000 |
Noncurrent assets | 2,700,000 | Long-term liabilities | 500,000 |
Total assets | \)3,500,000 | Stockholders’ equity | 2,400,000 |
Total liabilities and stockholders’ equity | \(3,500,000 |
It was determined at the date of the purchase that the fair value of the identifiable net assets of Conchita was \)2,750,000. Over the next 6 months of operations, the newly purchased division experienced operating losses. In addition, it now appears that it will generate substantial losses for the foreseeable future. At December 31, 2017, Conchita reports the following balance sheet information.
Current assets | \( 450,000 |
Noncurrent assets (including goodwill recognized in purchase) | 2,400,000 |
Current liabilities | (700,000) |
Long-term liabilities | (500,000) |
Net assets | \)1,650,000 |
It is determined that the fair value of the Conchita Division is \(1,850,000. The recorded amount for Conchita’s net assets (excluding goodwill) is the same as fair value, except for property, plant, and equipment, which has a fair value \)150,000 above the carrying value.
Instructions
Prepare the journal entry to record the impairment loss, if any, and indicate where the loss would be reported in the income statement.
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