Q1. Accounting for Goodwill
Fred Moss, owner of Moss Interiors, is negotiating for the purchase of Zweitel Galleries. The following balance sheet of Zweifel is given in an abbreviated form as follows.
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ZWEIFEL GALLERIES BALANCE SHEET As OF DECEMBER 31, 2017
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Assets
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Liabilities and Stockholders' Equity
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Cash
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$100,000
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Accounts payable
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$50,000
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Land
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70,000
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Notes payable (long-term)
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300,000
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Buildings (net)
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200,000
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Total liabilities
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350,000
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Equipment (net)
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175,000
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Common stock
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$200,000
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Copyrights (net)
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30,000
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Retained earnings
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25,000
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225,000
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Total assets
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$575,000
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Total liabilities and stockholders' equity
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$575,000
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Moss and Zweifel agree that:
1. Land is undervalued by $30,000.
2. Equipment is overvalued by $5,000.
Zweifel agrees to sell the gallery to Moss for $350,000.
Instructions - Prepare the entry to record the purchase of Zweifel Galleries on Moss's books.
Q2. Copyright Impairment
Presented below is information related to copyrights owned by Mare Company at December 31, 2017,
Cost - $8,600,000
Carrying amount - 4,300,000
Expected future net cash flows - 4,000,000
Fair value - 3,200,000
Assume that Mare Company will continue to use this copyright in the future. As of December 31, 2017, the copyright is estimated to have a remaining useful life of 10 years.
Instructions -
(a) Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2017. The company does not use accumulated amortization accounts.
(b) Prepare the journal entry to record amortization expense for 2018 related to the copyrights.
(c) The fair value of the copyright at December 31, 2018, is $3,400,000. Prepare the journal entry (if any) necessary to record the increase in fair value.
Q3. Goodwill Impairment
Presented below is net asset information related to the Carlos Division of Santana, Inc.
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CARLOS DIVISION NET ASSETS As OF DECEMBER 31, 2017 (IN MILLIONS)
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Cash
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$50
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Accounts receivable
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200
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Property, plant, and equipment (net)
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2,600
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Goodwill
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200
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Less: Notes payable
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(2,700)
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Net assets
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$350
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The purpose of the Carlos Division is to develop a nuclear-powered aircraft. If successful traveling delays associated with refueling could be substantially reduced. Many other benefits would also occur. To date, management has not had much success and is deciding whether a write-down at this time is appropriate. Management estimated its future net cash flows from the project to be 5400 million. Management has also received an offer to purchase the division for $335 million. All identifiable assets' and liabilities' book and fair value amounts are the same.
Instructions
(a) Prepare the journal entry (if any) to record the impairment at December 31, 2017.
(b) At December 31, 2018, it is estimated that the division's fair value increased to $345 million. Prepare the journal entry (if any) to record this increase in fair value.
Q4. Accounting for R&D Costs
More Company incurred the following costs during the current year in connection with its research and development activities.
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Cost of equipment acquired that will have alternative uses in future R&D projects over the next 5 years (uses straight-line depreciation)
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$280,000
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Materials consumed in R&D projects
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59,000
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Consulting fees paid to outsiders for R&D projects
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100,000
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Personnel costs of persons involved in R&D projects
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128,000
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Indirect costs reasonably allocable to R&D projects
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50,000
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Materials purchased for future R&D projects
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34,000
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Instructions - Compute the amount to be reported as research and development expense by More on its current year income statement. Assume equipment is purchased at the beginning of the year.
Q5. Accounting for patents
Fields Laboratories holds a valuable patent (No. 758-6002-1A) on a precipitator that prevents certain types of air pollution. Fields does not manufacture or sell the products and processes it develops. Instead, it conducts research and develops products and processes which it patents, and then assigns the patents to manufacturers on a royalty basis. Occasionally it sells a patent. The history of Fields patent number 758-6002-1A is as follows.
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Date
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Activity
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Cost
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2008-2009
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Research conducted to develop precipitator
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$384,000
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Jan. 2010
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Design and construction of a prototype
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87,600
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March 2010
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Testing of models
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42,000
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Jan. 2011
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Fees paid engineers and lawyers to prepare patent application; patent granted June 30, 2011
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59,500
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Nov. 2012
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Engineering activity necessary to advance the design of the precipitator to the manufacturing stage
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81,500
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Dec. 2013
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Legal fees paid to successfully defend precipitator patent
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42,000
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April 2014
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Research aimed at modifying the design of the patented precipitator
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43,000
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July 2018
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Legal fees paid in unsuccessful patent infringement suit against a competitor
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34,000
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Fields assumed a useful life of 17 years when it received the initial precipitator patent. On January 1, 2016, it revised its useful life estimate downward to 5 remaining years. Amortization is computed for a full year if the cost is incurred prior to July L and no amortization for the year if the cost is incurred after June 30. The company's year ends December 31.
Instructions - Compute the carrying value of patent No. 758-6002-1A on each of the following dates:
(a) December 31, 2011.
(b) December 31, 2015.
(c) December 31, 2018.
Q6. 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.
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Current assets
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$800,000
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Current liabilities
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$600,000
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Noncurrent assets
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2,700,000
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Long-term liabilities
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500,000
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Total assets
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$3,500,000
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Stockholder's equity
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2,400,000
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Total liabilities and stockholders' equity
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$3,500,000
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It was determined at the date of the purchase that the fair value of the identifiable net assets of Conchita was 52,750,000. 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.
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Current assets
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$450,000
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Noncurrent assets (including goodwill recognized in purchase)
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2,400,000
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Current liabilities
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(700,000)
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Long-term liabilities
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(500,000)
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Net assets
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$4,650,000
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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, expect for property, plant, and equipment, which has a fair value $150,000 above the carrying value.
Instructions -
(a) Compute the amount of goodwill recognized, if any, on July 31, 2017.
(b) Determine the impairment loss, if any, to be recorded on December 31, 2017.
(c) Assume that fair value of the Conchita Division is $1,600,000 instead of $1,850,000. Determine the impairment loss, if any, to be recorded on December 31, 2017.
(d) Prepare the journal entry to record the impairment loss, if any, and indicate where the loss would be reported in the income statement.