Chapter 12 - SFAS Nos. 141 and 142
Chapter 12
End-of-Chapter Material Relating to SFAS Nos. 141 and 142
QUESTIONS:
1. In general, how is the cost of internally-generated intangibles accounted for?
2. What are the five general categories of intangible assets?
3. What two approaches are used in estimating fair values using present value computations?
Briefly explain the difference between the two approaches.
4. (a) Under what conditions may goodwill be reported as an asset? (b) The Roper Company
engages in a widespread advertising campaign on behalf of new products, charging abovenormal expenditures to goodwill. Do you approve of this practice? Why or why not?
5. What intangible assets are recognized in a basket purchase but are not recognized when
acquired as part of a business combination?
PRACTICE 1
ACCOUNTING FOR THE ACQUISITION OF AN ENTIRE COMPANY
James Company purchased Thomas Manufacturing for $1,000,000 cash on January 1. The book value and
fair value of the assets of Thomas as of the date of the acquisition are listed below:
Book
Market
Value
Value
Cash
$ 10,000
$ 10,000
Accounts receivable
100,000
100,000
Inventory
200,000
300,000
Patent
0
50,000
Property, plant, and equipment
400,000
600,000
Totals
$710,000
$1,060,000
In addition, Thomas had liabilities totaling $400,000 at the time of the acquisition. Thomas has no other
separately-identifiable intangible assets. Make the journal entry necessary on the books of James Company
to record the acquisition.
PRACTICE 2
ACCOUNTING FOR NEGATIVE GOODWILL
Refer to Practice 12-14. Assume that the cash acquisition price is $500,000 instead of $1,000,000. Make
the journal entry necessary on the books of James Company to record the acquisition.
PRACTICE 3
INTANGIBLES AND A BASKET PURCHASE
The company paid $500,000 to purchase the following: a building with an appraised value of $200,000, an
operating permit valued at $100,000, and ongoing research and development projects valued at $150,000.
In addition, it is estimated that the fair value of the assembled work force currently operating in the
building is $100,000. Make the journal entry necessary to record this cash purchase.
PRACTICE 4
INTANGIBLES AND A BUSINESS ACQUISITION
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Chapter 12 - SFAS Nos. 141 and 142
Buyer Company purchased Target Company for $800,000 cash. Target Company had total liabilities of
$300,000. Buyer Company’s assessment of the fair values it obtained when it purchased Target Company is
as follows:
Cash
Inventory
In-process R&D
Assembled work force
$100,000
50,000
500,000
120,000
Make the journal entry necessary to record this business acquisition.
EXERCISE 1
PURCHASE OF A COMPANY
Hull Company purchased Heaston Company for $750,000 cash. A schedule of
the market values of Heaston’s assets and liabilities as of the purchase date is
given below.
Heaston Company
Schedule of Asset and Liability Market Values
Assets
Cash ............................................................................................................................... $ 5,000
Receivables ................................................................................................................. 78,000
Inventory ....................................................................................................................... 136,000
Land, buildings, and equipment ......................................................................... 436,000
$655,000
Liabilities
Current liabilities ........................................................................................................ $ 80,000
Long-term debt........................................................................................................... 120,000
200,000
Net asset market value ..........................................................................................
1.
2.
EXERCISE 2
$455,000
Make the journal entry necessary for Hull Company to record the
purchase.
Assume that the purchase price is $385,000 cash. Make the journal entry
necessary to record the purchase.
PURCHASE OF A COMPANY
Caruthers Inc. is considering purchasing K&M Properties, which has the
following assets and liabilities.
Cost
Fair Market Value
Accounts receivable ........................................................................
Inventory ...............................................................................................
Prepaid insurance.............................................................................
Buildings and equipment (net) ....................................................
Accounts payable .............................................................................
$240,000
240,000
10,000
70,000
(160,000)
$220,000
250,000
10,000
200,000
(160,000)
Net assets ............................................................................................
$400,000
$520,000
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Chapter 12 - SFAS Nos. 141 and 142
1.
2.
EXERCISE 3
Make the journal entry necessary for Caruthers Inc. to record the
purchase if the purchase price is $630,000 cash.
Assume that the purchase price is $300,000 cash. Make the journal entry
necessary to record the purchase.
BASKET PURCHASE OF INTANGIBLE ASSETS
Taraz Compan paid $500,000 to purchase the following portfolio of intangibles with estimated fair values
as indicated:
Internet domain name
Order backlog
In-process research and development
Operating permit
Estimated
Fair Value
$150,000
100,000
200,000
80,000
In addition, Taraz spent $300,000 to run an advertising campaign to boost its image in the local
community.
Make the journal entries necessary to record the purchase of the intangibles and the payment for the
advertising.
EXERCISE 4
ACQUISITION
PURCHASE OF INTANGIBLE ASSETS IN A BUSINESS
Cossack Company purchased Village Enterprises. The following fair values
were associated with the items acquired in this business acquisition:
Cost
Fair Value
Accounts receivable ........................................................................
Inventory ...............................................................................................
Government contacts ......................................................................
Equipment (net) .................................................................................
Short-term loan payable ................................................................
$200,000
100,000
0
40,000
(200,000)
$200,000
50,000
100,000
50,000
(200,000)
Net assets ............................................................................................
$140,000
$200,000
The fair value associated with Village Enterprises’ government contacts is not
based on any legal or contractual relationship. In addition, for obvious
reasons, there is no open market trading for intangibles of this sort.
1.
2.
PROBLEM 1
Make the journal entry necessary for Cossack Company to record the
purchase if the purchase price is $900,000 cash.
Assume that the purchase price is $35,000 cash. Make the journal entry
necessary to record the purchase.
RECORDING GOODWILL
The Aurora Corp. acquired Payette Company on December 31, 2005. The
following information concerning Payette’s assets and liabilities was assembled
on the acquisition date.
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Chapter 12 - SFAS Nos. 141 and 142
Per
Company’s Books
As Adjusted by
Appraisal and Audit
$307,000
179,200
$340,000
260,000
$486,200
$600,000
Current liabilities ....................................................................
Long-term liabilities ..............................................................
(25,000)
(160,000)
(25,000)
(160,000)
Net assets ................................................................................
$301,200
$415,000
Assets
Current assets ........................................................................
Land, buildings, and equipment (net) ..........................
Liabilities
Instructions:
1.
2.
3.
4.
PROBLEM 2
Make the journal entry necessary for Aurora Corp. to record the purchase
assuming the purchase price was $1,500,000 in cash.
Why might Aurora be willing to pay such a high price for Payette?
Repeat (1), assuming the purchase price is $350,000.
Repeat (1), assuming the purchase price is $150,000.
ACQUISITION AND VALUATION OF INTANGIBLES
Derrald Divine Company purchased a customer list and an on-going research
project for a total of $400,000. Derrald uses the expected cash flow approach for
estimating the fair value of these two intangibles. The appropriate interest rate is
7 percent. The potential future cash flows from the two intangibles, and their
associated probabilities, are as follows:
Customer list
Outcome 1
20% probability of cash flows of $50,000 at the end of each
year for 5 years.
Outcome 2
30% probability of cash flows of $30,000 at the end of each
year for 4 years.
Outcome 3
50% probability of cash flows of $10,000 at the end of each
year for 3 years.
On-going research project
Outcome 1
10% probability of cash flows of $500,000 at the end of each
year for 10 years.
Outcome 2
10% probability of cash flows of $10,000 at the end of each
year for 4 years.
Outcome 3
80% probability of cash flows of $100 at the end of each year
for 3 years.
Instructions: Prepare the journal entry necessary to record the purchase of the
two intangibles.
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Chapter 12 - SFAS Nos. 141 and 142
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