Concept explainers
1.
Prepare
1.
Explanation of Solution
Impairment: Impairment refers to the decrease in the value of long-lived assets due to obsolescence, damage. If the remaining book value of a plant asset could not be recovered from the future cash flows expected to be generated from the use of the asset, the value of the plant asset is said to be impaired. When the long-lived asset is impaired, then the future cash flows expected to be generated from the use of the asset is less than the current book value of the asset.
Prepare journal entries to record the impairment of intangible assets of Company W at December 31, 2016 as follows:
Loss on impairment of patent:
Date | Accounts Title and Explanation | Post Ref. | Debit ($) | Credit ($) |
December 31, 2016 | Loss on impairment-Patent (3) | 18,000 | ||
Patent | 18,000 | |||
(To record the impairment loss of patent) |
Table (1)
- Loss on impairment-patent is an expense account and it decreases the equity value. Hence, debit the loss on impairment account with $18,000.
- Patent is an asset account and it is decreased. Therefore, credit the patent account with $18,000.
Working note (1):
Calculate the
Working note (2):
Calculate the book value of patent.
Working note (3):
Calculate the impairment loss of patent.
Loss on impairment of tradename:
In this case, trade name is not impaired, because the fair value of trade name is higher than the original cost. At the same time, GAAP does not allow revaluation of intangible assets as a result the carrying value of the trade name is not increased.
Loss on impairment of
In this case, the fair value of subsidiary company ($400,000) is greater than its carrying value ($150,000). Hence, company W must perform two step quantitative impairment tests.
- 1. If the fair value of subsidiary company ($400,000) is not greater than the book value ($750,000), then company W should perform second step of impairment test.
- 2. When the implied fair value of the goodwill ($80,000) is less than the carrying value of goodwill ($150,000), it indicates that Company W has recognized impairment loss on goodwill.
Date | Accounts Title and Explanation | Post Ref. | Debit ($) | Credit ($) |
December 31, 2016 | Impairment loss on Goodwill (5) | 70,000 | ||
Goodwill | 70,000 | |||
(To record the impairment loss of goodwill) |
Table (2)
- Impairment loss on goodwill is an expense account and it decreases the equity value. Hence, debit the loss on impairment account with $70,000.
- Goodwill is an asset account and it is decreased. Therefore, credit the goodwill account with $70,000.
Working note (4):
Calculate the implied fair value of goodwill.
Working note (5):
Calculate the impairment loss of goodwill.
2.
Prepare journal entries to record the amortization expense of Company W for December 31, 2017.
2.
Explanation of Solution
Prepare journal entries to record the amortization expense of Company W for December 31, 2017 as follows:
Amortization expense of patent:
Date | Account Title and Explanation |
Debit ($) |
Credit ($) |
December 31, 2017 | Amortization expense (6) | 7,000 | |
Patent | 7,000 | ||
(To record the amortization expense incurred) |
Table (3)
- Amortization expense is component of shareholders’ equity, and it decreases the value of shareholders equity. Hence, debit the amortization expense with $7,000.
- Patent is an asset account, and it decreases the value of asset. Hence, credit the patent account with $7,000.
Working note (6):
Calculate the amortization expense of patent.
Amortization expense of trade name:
Date | Account Title and Explanation |
Debit ($) |
Credit ($) |
December 31, 2017 | Amortization expense (7) | 16,000 | |
Trade name | 16,000 | ||
(To record the amortization expense incurred) |
Table (4)
- Amortization expense is component of shareholders’ equity, and it decreases the value of shareholders equity. Hence, debit the amortization expense with $16,000.
- Trade name is an asset account, and it decreases the value of asset. Hence, credit the trade name account with $16,000.
Working note (7):
Calculate the amortization expense of patent.
Amortization expense of goodwill:
In this case, the goodwill is not amortized during 2017.
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Chapter 12 Solutions
Intermediate Accounting: Reporting and Analysis (Looseleaf)
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