P12-6 (Comprehensive Intangible Assets) Montana Matt's Golf Inc. was formed on July
1, 2009, when Matt Magilke purchased the Old Master Golf Company. Old Master
provides video golf instruction at kiosks in shopping malls. Magilke plans to integrate the
instruction business into his golf equipment and accessory stores. Magilke paid $770,000
cash for Old Master. At the time Old Master's balance sheet reported assets of $650,000
and liabilities of $200,000 (thus owners' equity was $450,000). The fair value of Old
Master's assets is estimated to be $800,000. Included in the assets is the Old Master trade
name with a fair value of $10,000 and a copyright on some instructional books with a fair
value of $24,000. 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 40 years. Instructions (a)
Prepare the intangible assets section of Montana Matt's Golf Inc. at December 31, 2009.
How much amortization expense is included in Montana Matt's income for the year
ended December 31, 2009? Show all supporting computations. (b) Prepare the journal
entry to record amortization expense for 2010. Prepare the intangible assets section of
Montana Matt's Golf Inc. at December 31, 2010. (No impairments are required to be
recorded in 2010.) (c) At the end of 2011, is evaluating the results of the instructional
business. Due to fierce competition from online and television (e.g., the Golf Channel),
the Old Master reporting unit has been losing money. Its book value is now $500,000.
The fair value of the Old Master reporting unit is $420,000. The implied value of
goodwill is $90,000. Magilke has collected the following information related to the
company's intangible assets. Intangible Asset Exp.Cash Flows Fair Values Trade name $
9,000 $ 3,000 Copyright $ 30,000 $ 25,000 Prepare the journal entries required, if any, to
record impairments on Montana Matt's intangible assets. (Assume that any amortization
for 2011 has been recorded.) Show supporting computations.
(a)
MONTANA MATT’S GOLF INC.
Intangibles Section of Balance Sheet
December 31, 2009
Trade name .....................................................................................................................
Copyright (net accumulated amortization of $300)
(Schedule 1) ..................................................................................................................
Goodwill (Schedule 2) ....................................................................................................
Total intangibles .............................................................................................................
$ 10,000
23,700
170,000
$203,700
Schedule 1 Computation of Value of Old Master Copyright
Cost of copyright at date of purchase...........................................................................
Amortization of Copyright for 2009 [($24,000 ÷ 40) X 1/2 year] ......................................
Cost of copyright at December 31 ....................................................................
$ 24,000
(300)
$ 23,700
Schedule 2 Goodwill Measurement
Purchase price ....................................................................................
$770,000
Fair value of assets .............................................................................
Fair value of liabilities .......................................................................
Fair value of net assets ..........................................................
Value assigned to goodwill ................................................................
$800,000
(200,000)
600,000
$170,000
Amortization expense for 2009 is $300 (see Schedule 1). There is no amortization for
the goodwill or the trade name, both of which are considered indefinite life
intangible assets.
(b)
Copyright Amortization Expense ...............................................
Copyright ($24,000 ÷ 40) .........................................................
600
600
There is a full year of amortization on the Copyright. There is no amortization for
the goodwill or the trade name, which is considered an indefinite life intangible.
MONTANA MATT’S GOLF INC.
Intangibles Section of Balance Sheet
December 31, 2010
Trade name .......................................................................................................................
Copyright (net accumulated amortization of $900)
(Schedule 1) ....................................................................................................................
Goodwill ............................................................................................................................
Total intangibles ...............................................................................................................
Schedule 1 Computation of Value of Old Master Copyright
Cost of Copyright at date of purchase ...........................................................................
Amortization of Copyright for 2009, 2010
[($24,000 ÷ 40) X 1.5 years] ..........................................................................................
Cost of copyright at December 31 ......................................................................
(c)
Loss on Impairment ..............................................................................
Goodwill ($170,000 – $90,000*) ........................................................
Trade name ($10,000 – $3,000) .........................................................
*Fair value of Old Master reporting unit ...............................
Net identifiable assets (excluding goodwill)
($500,000 – $170,000) ...........................................................
$420,000
(330,000)
$ 10,000
23,100
170,000
$203,100
$ 24,000
(900)
$ 23,100
87,000
80,000
7,000
Implied value of goodwill .......................................................
$ 90,000
The Goodwill is considered impaired because the fair value of the business unit
($420,000) is less than its carrying value ($500,000). The copyright is not considered
impaired because the expected net future cash flows ($30,000) exceed the carrying
amount ($24,000).
QUESTION # 2 BE12-1 Celine Dion Corporation purchases a patent from Salmon
Company on January 1, 2010, for $54,000. The patent has a remaining legal life of 16
years. Celine Dion feels the patent will be useful for 10 years. Prepare Celine Dion's
journal entries to record the purchase of the patent and 2010 amortization.
a)Account/Description Patents Debit? Cash Credit? (To record purchase of patent.)
b)Account/Description? Patent amortization Expense Debit? Patents Credit? (To record
amortization.)
Patents ...........................................................................................................
Cash ...................................................................................................
54,000
Patent Amortization Expense .....................................................................
Patents ($54,000 X 1/10 = $5,400) ...................................................
5,400
54,000
5,400
QUESTION # 3 BE12-12 Nieland Industries had one patent recorded on its books as of
January 1, 2010. This patent had a book value of $288,000 and a remaining useful life of
8 years. During 2010, Nieland incurred research and development costs of $96,000 and
brought a patent infringement suit against a competitor. On December 1, 2010, Nieland
received the good news that its patent was valid and that its competitor could not use the
process Nieland had patented. The company incurred $85,000 to defend this patent. At
what amount should patent(s) be reported on the December 31, 2010, balance sheet,
assuming monthly amortization of patents? $ ?
Patent (1/1/10)
Legal costs (12/1/10)
Carrying
Amount
Life in
Months
Amortization Per
Month
Months
Amortization
$288,000
85,000
$373,000
96
85
$3,000
$1,000
12
1
Carrying amount ...............................................................................
Less: Amortization of patent (12 X $3,000) ...................................
Legal costs amortization (1 X $1,000) ..............................
$373,000
(36,000)
(1,000)
Carrying amount 12/31/10 ...............................................................
$336,000
QUESTION # 4 (Accounting for Patents) During 2007, Thompson Corporation 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, 2007, and had a legal life
of 20 years and a useful life of 10 years. Legal costs of $24,000 related to the patent were
incurred as of October 1, 2007. (a)Prepare all journal entries required in 2007 and 2008
as a result of the transactions above. Date Account/Description 2007 Research &
Development Expense Debit? Cash Credit? (To record research and development costs)
Account /Description Patents Debit? Cash Credit? ^(To record the patent)
Account/Description Patent Amortization Expense Debit? Patents Credit? ^(To record
amortization) 2008 Account/Description Patent amortization Expense Debit? Patents
Credit? (b) On June 1, 2009, Thompson spent $12,400 to successfully prosecute a patent
infringement. As a result, the estimate of useful life was extended to 12 years from June
1, 2009. Prepare all journal entries required in 2009 and 2010. (Round amounts to 0
decimal places, e.g. 2,510.) Date Account/Description 2009 Patents Debit? Cash Credit?
(To record prosecution of patent infringement) Account/Description Patent Amortization
Expense Debit? Patents Credit? (To record amortization) 2010 Patent Amortization
Expense Debit? Patents Credit? (c) In 2011, Thompson determined that a competitor's
product would make the New Age Piano obsolete and the patent worthless by December
31, 2012. Prepare all journal entries required in 2011 and 2012. (Round amounts to 0
decimal places, e.g. 2,510.) Date Account/Description 2011 and 2012 Patent Amorization
Expense Debit? Patents Credits?
E12-10)
(a)
2007
Research and Development Expense .........................................................
170,000
Cash...................................................................................................
170,000
Patents...........................................................................................................
24,000
Cash...................................................................................................
24,000
Patent Amortization Expense .....................................................................
600
Patents [($24,000 ÷ 10) X 3/12] .......................................................
2008
Patent Amortization Expense .....................................................................
2,400
Patents ($24,000 ÷ 10) ......................................................................
(b)
2009
600
Patents...........................................................................................................
12,400
2,400
Cash...................................................................................................
Patent Amortization Expense .....................................................................
2,575
Patents ($1,000 + $1,575) .................................................................
[Jan. 1–June 1: ($24,000 ÷ 10) X
5/12 = $1,000
June 1–Dec. 31: ($24,000 – $600 –
$2,400 – $1,000 + $12,400) = $32,400;
($32,400 ÷ 12) X 7/12 = $1,575]
2010
(c)
Patent Amortization Expense .....................................................................
2,700
Patents ($32,400 ÷ 12) ......................................................................
2011 and 2012
Patent Amortization Expense .....................................................................
14,063
Patents ($28,125 ÷ 2) ........................................................................
($32,400 – $1,575 – $2,700) = $28,125
12,400
2,575
2,700
14,063