Exercise 1
E.12.10, During 2000, George Winston Co spent $ 170,000 in research
and development costs. As a result, a new product called the New
Age Piano was patented. The patent was obtained on October 1,
2000, and had a legal life of 20 years and a useful life of 10 years.
Legal costs of $ 18,000 related to the patent were incurred as of
October 1, 2000.
Instructions :
a. Prepare all journal entries required in 2000 and 2001 as a result of
the transactions above.
b. On June 1, 2002, Winston spent $ 9,480 to successfully prosecute
a patent infringement. As a result, the estimate of useful life was
extended to 12 years from June 1, 2002. Prepare all journal
entries required in 2002 and 2003.
c. In 2004, Winston determined that a competitor’s product would
make the New Age Piano obsolete and the patent worthless by
December 31, 2005. Prepare all journal entries required in 2004
and 2005.
Answer of Exercise 1
a. Year 2000
Research and Development Expense 170,000
Cash
170,000
Patents
18,000
Cash
18,000
Patent Amortization Expense
450
Patents [($ 18,000  10) X 3/12]
450
Year 2001
Patent Amortization Expense
1,800
Patents ($ 18,000  10)
1,800
Answer of Exercise 1
b. Year 2002
Patents
9,480
Cash
9,480
Patent Amortization Expense
Patents
1,940
1,940
Jan 1 – June 1, ($ 18,000 : 10) X 5/12 = $ 750)
June 1 – Dec 31, ($ 18,000 - $ 450 - $ 1,800 - $ 750 + $ 9,480 = $ 24,480)
($ 24,480 : 12) x 7/12 = $ 1,190
Year 2003
Patent Amortization Expense
Patents ($ 24,480  12)
2,040
2,040
Answer of Exercise 1
c. Year 2004 and 2005
Patent Amortization Expense
Patents
($ 21,250 : 2 = $ 10,625)
($ 24,480 - $ 1,190 - $ 2,040 = $ 21,250)
10,625
10,625
Exercise 2
E.12.14, Presented below is information related to copy rights owned by
Walter de La More Co at December 31, 2004
Cost $ 8,600,000
Carrying amount $ 4,300,000
Expected future net cash flow $ 4,000,000
Fair value $ 3,200,000
Assume that Walter de La More will continue to use this copyright in the
future. As of December 31, 2004, the copyright is estimated to have
remaining useful life of 10 years.
Instructions :
a. Prepare the journal entry (if any) to record the impairment of the
asset at December 31, 2004. The company does not use accumulated
amortization account.
b. Prepare the journal entry to record amortization expense for 2005
related to the copyrights.
c. The fair value of the copyright at December 31, 2005 is $ 3,400,000.
Prepare the journal entry (if any) necessary to record the increase in
fair value.
Answer of Exercise 2
(a) December 31, 2004
Loss on Impairment
Copyrights
1,100,000
1,100,000
Carrying amount
$ 4,300,000
Fair value
$ 3,200,000
Loss on impairment $ 1,100,000
(b) Copyright Amortization Expense
Copyrights
New carrying amount
Useful life
Amortization per year
$ 3,200,000
 10 years
$ 320,000
(c) Tidak dibutuhkan jurnal.
320,000
320,000
Exercise 3
P.12-5, On July 31, 2003, Postera Company paid $ 3,000,000 to
acquire all of the common stock of Mendota Incorporated, which
became a division of Postera. Mendota reported the following balance
sheet at the time of the acquisition.
Current assets
Non current assets
Total assets
$
800,000 Current liabilities
$
600,000
2,700,000 Long term liabilities
500,000
$ 3,500,000 Stockholders equity
2,400,000
Total liabilities & Equity $ 3,500,000
It was determined at the date of the purchase that the fair value of
the identifiable net assets of Mendota was $ 2,650,000. Over the
next 6 months of the operations, the newly purchased division
experienced operating loss. In addition, it now appears that it will
generate substantial losses for the foreseeable future. At December
31, 2003, Mendota reports the following balance sheet information :
Current assets
Non current assets (including goodwill)
Current liabilities
Long term liabilities
Net assets
$
$
$
$
$
450,000
2,400,000
(700,000)
(500,000)
1,650,000
Exercise 3
(P.12-5, continued),
It determined that the fair value of the Mondeta Division is $
1,850,000. The recorded amount for Mendota’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 :
a. Compute the amount of goodwill recognized, if any, on July 31,
2003.
b. Determine the impairment loss, if any, to be recorded on
December 31, 2003.
c. Assume that fair value of the Mendota Division is $ 1,500,000
instead of $ 1,850,000. Determine the impairment loss, if any, to
be recorded on December 31, 2003.
d. Prepare the journal entry to record the impairment loss, if any,
and indicate where the loss would be reported in the income
statement
Answer of Exercise 3
(a) Goodwill = Fair value of the division less the fair value of the identifiable
assets:
$ 3,000,000 – $ 2,650,000 = $ 350,000
(b) No impairment loss is recorded, because the fair value of Mendota ($
1,850,000) is greater than carrying value of the net assets ($ 1,650,000).
(c) Computation of impairment:
Implied Fair value of goodwill = Fair value of division less the carrying value of
the division (adjusted for fair value changes), net of goodwill:
Fair value of Mendota division
$ 1,500,000
Carrying value of division
$ 1,650,000
Increase in fair value of PP&E
150,000
Less Goodwill
(350,000)
Patents ($ 74,000 + $ 12,650)
(1,450,000)
Implied fair value of Goodwill
50,000
Carrying value of Goodwill
(350,000)
Impairment loss
($
300,000)
(d) Loss on Impairment
Goodwill
300,000
300,000
This loss will be reported in income as a separate line item before the subtotal
“income from continuing operations.”