Intermediate Accounting Assignment
Exercise 1 - Presented below is selected information related to Martin Burke Inc. at year-end. All these accounts have debit balances.
Cable television franchises Film contract rights
Music copyrights Customer lists
Research and development costs Prepaid expenses
Goodwill Covenants not to compete
Cash Brand names
Discount on notes payable Notes receivable
Accounts receivable Investments in affiliated companies
Property, plant, and equipment Organization costs
Internet domain name Land
Instructions: Identify which items should be classified as an intangible asset. For those items not classified as an intangible asset, indicate where they would be reported in the financial statements.
Exercise 2 - The following is selected information for Alatorre Company.
1. Alatorre purchased a patent from Vania Co. for $1,000,000 on January 1, 2015. The patent is being amortized over its remaining legal life of 10 years, expiring on January 1, 2025. During 2017, Alatorre determined that the economic benefits of the patent would not last longer than 6 years from the date of acquisition. What amount should be reported in the balance sheet for the patent, net of accumulated amortization, at December 31, 2017?
2. Alatorre bought a franchise from Alexander Co. on January 1, 2016, for $400,000. The carrying amount of the franchise on Alexander's books on January 1, 2016, was $500,000. The franchise agreement had an estimated useful life of 30 years. Because Alatorre must enter a competitive bidding at the end of 2018, it is unlikely that the franchise will be retained beyond 2025. What amount should be amortized for the year ended December 31, 2017?
3. On January 1, 2017, Alatorre incurred organization costs of $275,000. What amount of organization expense should be reported in 2017?
4. Alatorre purchased the license for distribution of a popular consumer product on January 1, 2017, for $150,000. It is expected that this product will generate cash flows for an indefinite period of time. The license has an initial term of 5 years but by paying a nominal fee, Alatorre can renew the license indefinitely for successive 5-year terms. What amount should be amortized for the year ended December 31, 2017?
Instructions: Answer the questions asked about each of the factual situations.
Exercise 3 - On July 31, 2017, Mexico Company paid $3,000,000 to acquire all of the common stock of Conchita Incorporated, which became a division of Mexico. Conchita reported the following balance sheet at the time of the acquisition.
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Current assets
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$800,000
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Current liabilities
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$600,000
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Noncurrent assets
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2,700,000
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Long-term liabilities
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500,000
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Total assets
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$3,500,000
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Stockholders' equity
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2,400,000
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Total liabilities and stockholders' equity
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$3,500,000
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It was determined at the date of the purchase that the fair value of the identifiable net assets of Conchita was $2,750,000. Over the next 6 months of operations, the newly purchased division experienced operating losses. In addition, it now appears that it will generate substantial losses for the foreseeable future. At December 31, 2017, Conchita reports the following balance sheet information.
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Current assets
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$450,000
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Noncurrent assets (including goodwill recognized in purchase)
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2,400,000
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Current liabilities
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(700,000)
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Long-term liabilities
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(500,000)
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Net assets
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$1,650,000
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It is determined that the fair value of the Conchita Division is $1,850,000. The recorded amount for Conchita'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, 2017.
(b) Determine the impairment loss, if any, to be recorded on December 31, 2017.
(c) Assume that fair value of the Conchita Division is $1,600,000 instead of $1,850,000. Determine the impairment loss, if any, to be recorded on December 31, 2017.
(d) Prepare the journal entry to record the impairment loss, if any, and indicate where the loss would be reported in the income statement.
Exercise 4 - On June 30, 2017, your client, Ferry Company, was granted two patents covering plastic cartons that it had been producing and marketing profitably for the past 3 years. One patent covers the manufacturing process, and the other covers the related products.
Ferry executives tell you that these patents represent the most significant breakthrough in the industry in the past 30 years. The products have been marketed under the registered trademarks Evertight, Duratainer, and Sealrite. Licenses under the patents have already been granted by your client to other manufacturers in the United States and abroad, and are producing substantial royalties.
On July 1, Ferry commenced patent infringement actions against several companies whose names you recognize as those of substantial and prominent competitors. Ferry's management is optimistic that these suits will result in a permanent injunction against the manufacture and sale of the infringing products as well as collection of damages for loss of profits caused by the alleged infringement.
The financial vice president has suggested that the patents be recorded at the discounted value of expected net royalty receipts.
Instructions
(a) What is the meaning of "discounted value of expected net receipts"? Explain.
(b) How would such a value be calculated for net royalty receipts?
(c) What basis of valuation for Ferry's patents would be generally accepted in accounting? Give supporting reasons for this basis.
(d) Assuming no practical problems of implementation and ignoring generally accepted accounting principles, what is the preferable basis of valuation for patents? Explain.
(e) What would be the preferable theoretical basis of amortization? Explain.
(f) What recognition, if any, should be made of the infringement litigation in the financial statements for the year ending September 30, 2017? Discuss.