Chapter 12: Question 1 (page 637)
What are the two main characteristics of intangible assets?
It is not physical, meaning it exists as a legal authority and is distinguishable from other assets.
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Simon Company determines that its goodwill is impaired. It finds that its implied goodwill is \(360,000 and its recorded goodwill is \)400,000. The fair value of its identifiable assets is $1,450,000. What is the amount of goodwill impaired?
On January 2, 2017, Raconteur Corp. reported the following intangible assets: (1) copyright with a carrying value of \(15,000, and (2) a trade name with a carrying value of \)8,500. The trade name has a remaining life of 5 years and can be renewed at nominal cost indefinitely. The copyright has a remaining life of 10 years.
At December 31, 2017, Raconteur assessed the intangible assets for possible impairment and developed the following information.
Estimated Undiscounted Expected Future Cash Flows | Estimated Fair Value | |
Copyright | \(20,000 | \)16,000 |
Trade name | 10,000 | 5,000 |
Accounting
Prepare any journal entries required for Raconteur’s intangible assets at December 31, 2017.
Analysis
Many stock analysts indicate a preference for less-volatile operating income measures. Such measures make it easier to predict future income and cash flows, using reported income measures. How does the accounting for impairments of intangible assets affect the volatility of operating income?
Principles
Many accounting issues involve a trade-off between the primary characteristics of relevant and representationally faithful information. How does the accounting for intangible asset impairments reflect this trade-off?
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.
(Accounting for Pre-Opening Costs) After securing lease commitments from several major stores, Auer Shopping Center, Inc. was organized and built a shopping center in a growing suburb.
The shopping center would have opened on schedule on January 1, 2017, if it had not been struck by a severe tornado in December. Instead, it opened for business on October 1, 2017. All of the additional construction costs that were incurred as a result of the tornado were covered by insurance.
In July 2016, in anticipation of the scheduled January opening, a permanent staff had been hired to promote the shopping center, obtain tenants for the uncommitted space, and manage the property.
A summary of some of the costs incurred in 2016 and the first nine months of 2017 follows.
2016 | January 1, 2017, through September 30, 2017 | |
Interest on mortgage bonds | \(720,000 | \)540,000 |
Cost of obtaining tenants | 300,000 | 360,000 |
Promotional advertising | 540,000 | 557,000 |
The promotional advertising campaign was designed to familiarize shoppers with the center. Had it been known in time that the center would not open until October 2017, the 2016 expenditure for promotional advertising would not have been made. The advertising had to be repeated in 2017.
All of the tenants who had leased space in the shopping center at the time of the tornado accepted the October occupancy date on the condition that the monthly rental charges for the first 9 months of 2017 be canceled.
Instructions
Explain how each of the costs for 2016 and the first 9 months of 2017 should be treated in the accounts of the shopping center corporation. Give the reasons for each treatment.
Waters Corporation purchased Johnson Company 3 years ago and at that time recorded goodwill of \(400,000. The Johnson Division’s net assets, including the goodwill, have a carrying amount of \)800,000. The recoverable amount of the division is estimated to be $1,000,000. Prepare Waters’ journal entry, if necessary, to record an impairment of the goodwill.
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