Question

Question: (Accounting for Trade Name) In early January 2016, Outkast Corporation applied for a trade name, incurring legal costs of \(16,000. In January 2017, Outkast incurred \)7,800 of legal fees in a successful defense of its trade name.

Instructions

1. Compute 2016 amortization, 12/31/16 book value, 2017 amortization, and 12/31/17 book value if the company amortizes the trade name over 10 years.
2. Compute the 2017 amortization and the 12/31/17 book value, assuming that at the beginning of 2017, Outkast determines that the trade name will provide no future benefits beyond December 31, 2020.
3. Ignoring the response for part (b), compute the 2018 amortization and the 12/31/18 book value, assuming that at the beginning of 2018, based on new market research, Outkast determines that the fair value of the trade name is \(15,000. Estimated total future cash flows from the trade name is \)16,000 on January 3, 2018.

Short answer

Answer

1. Amortization value = $1,600
2. Amortization value = $5,500
3. The trade name fails to pass the +recovery test

Step-by-step solution

Meaning of Amortization

Amortization of Intangible Assets alludes to the strategy under which the cost of the distinctive intangible assetsof the company (assets that don't have any physical existence, cannot be felt and touched like trademark, goodwill, patents, etc.) are expensed over the particular periodof time.

Computation of amortization value (a)

Calculation of amortization value 2016

$$\begin{gathered} \text{Amortization}\text{value}=\frac{\text{Legal}\text{costs}}{\text{Total}\text{years}} \\ =\frac{\$16,000}{10} \\ =\$1,600 \end{gathered}$$

The book value of amortization on 31/12/2017 is $14,400 ($\$16,000-\$1,600$)

Calculation of amortization value 2017

$$\begin{gathered} \text{Amortization}\text{value}=\frac{\text{Legal}\text{cost + Legal}\text{fees}}{\text{Total}\text{years}} \\ =\frac{\$14,400+\$7,800}{9} \\ =\frac{\$22,200}{9} \\ =\$2,467 \end{gathered}$$

The book value of amortization on 31/12/2017 is $19,733 ($\$14,400+\$7,800-\$2,467$)

Computing value of amortization (b)

Calculation of amortization value of 2017

$$\begin{gathered} \text{Amortization}\text{value}=\frac{\text{Legal}\text{cost}+\text{Legal}\text{fees}}{\text{Total}\text{years}} \\ =\frac{\$14,400+\$7,800}{4} \\ =\frac{\$22,200}{4} \\ =\$5,500 \end{gathered}$$

Book value on 12/31/17 is $16,650 ($\$14,400+\$7,800-\$5,500$)

Computing value of amortization (c)

Since the carrying value ($19,733) exceeds projected cash flows ($16,000), the trade name fails to pass the recoverability test. The new carrying value is $15,000, which is the fair market worth of the trade name.

2018 amortization (after recording impairment loss):

$$\begin{gathered} \text{Amortization}=\frac{\text{Fair}\text{value}}{\text{Total}\text{years}} \\ =\frac{\$15,000}{8} \\ =\$1,875 \end{gathered}$$

Book value on 12/31/18 is $13,125 ($\$15,000-\$1,875$)