Chapter 12 Group Work

  1. River Inc. has offered to purchase Ponds Unlimited for a price of $580,000. The Balance Sheet of Ponds Unlimited at the time of the purchase is as follows:

Cash 48,000

Receivables 84,000

Inventory220,000

Equipment 90,000

Copyright 16,000

Total Assets458,000

Accts Payable 66,000

The account balances on the Balance Sheet approximate Fair Market Values except for Inventory [which has a FMV $315,000] and the Copyright [which has a FMV $35,000]. Prepare the journal entry that River Inc. would record at the time of the purchase.

DR CR

Cash 48,000

Accounts Receivable 84,000

Inventory315,000

Equipment 90,000

Copyright 35,000

Goodwill 74,000

Accounts Payable66,000

Cash 580,000

  1. Assume River Inc. offered to purchase Ponds Unlimited for a price of $450,000. How would you record what appears to be “Negative Goodwill”? Prepare the journal entry for River Inc.

DR CR

Cash 48,000

Accounts Receivable 84,000

Inventory 315,000

Equipment 90,000

Copyright 35,000

Accounts Payable 66,000

Cash450,000

Gain on Purchase 56,000

  1. The following information is available for Carter Company’s Patent:

Cost$850,000

Carrying Amount$520,000

Expected Future Net Cash Flows $490,000

Fair Value$375,000

Prepare a journal entry to record the Impairment Loss for the value of Carter Company’s Patent.

Loss on Impairment145,000

Patent145,000

4.On October 1, 2017, Braxton Co. purchased a Patent for $90,000. Additional legal costs incurred to obtain the patent were $33,750. The Patent has a remaining legal life of 19 years, but the company expects a useful life of 15 years. What amount of amortization expense would Braxton Co. recognize for the year 2017 on the Patent asset? [Round answer to nearest dollar – ex) $42.51 = $43]

($90,000 + $33,750)= $8,250 * 3/12 = $2,063

15

Amortization Expense$2,063

Accumulated Amortization$2,063

  1. Match Box Inc. purchased a patent on January 1, 2013 for $170,000. The patent had a remaining useful life of 8 years at that date. In January of 2017, Match Box Inc successfully defended its patent in court at a cost of $65,000, extending the patent’s life to 16 years.
  2. What would be the amount of amortization expense Match Box Inc would record in 2017?
  3. Prepare the journal entry to record 2017 amortization on the Patent.

$170,000 = $21,250 * 4 yrs = $85,000

8 yrs

($170,000 - $85,000 + $65,000) = $12,500 Amortization Exp.for 2010 and each yr beyond

12 yrs

Amortization Expense$12,500

Accumulated Amortization $12,500

  1. During 2015, Coleman Company acquired Monet Company for $950,000, of which $110,000 was allocated to Goodwill. At the end of 2017, Coleman company tested for the possible impairment of Goodwill and provided the following information:

Fair Value of Monte$840,000

Fair Value of Monte’s net Assets [excluding Goodwill]$790,000

Book Value of Net Assets [including Goodwill]$885,000

What, if any, is the impairment loss suffered on the value of Goodwill for Coleman Co.’s newly acquired business?

FV - $840,000 is less than BV - $885,000 -- So there is an impairment loss.

FV of Monte [with Goodwill] $840,000

Less: FV of Monet [without Goodwill]($790,000)

Equals: Implied Value of Goodwill $50,000

Carrying Value of Goodwill$110,000

Less: Implied Value of Goodwill($ 50,000)

Equals: Goodwill Impairment Loss 60,000

DR CR

Loss on impairment of Goodwill60,000

Goodwill60,000