Pacific Inc. was formed on July 1, 2012 when Roy Clemons purchased the Coastal Bike Company. Coastal Bike organizes and provides bike tours along U.S. coastal areas. Clemons paid $350,000 cash for Coastal Bike. At the time, Coastal Bike's balance sheet reported assets of $400,000 and liabilities of $300,000 (thus stockholders equity was $100,000). The fair value of Coastal Bike's assets is estimated to be $540,000. Included in the assets is the Coastal Bike trade name with a fair value of $60,000 and a copyright on some tour books with a fair value of $20,000. The trade name has a remaining life of 10 years and can be renewed at nominal cost indefinitely. The copyright has a remaining life of 20 years.
(a) Prepare the intangible assets section of Pacific Inc. at December 31,2012. How much amortization expense is included Pacific's income for the year ended December 31,2012? Show all supporting computations.
(b) Prepare the journal entry to record amortization expense for 2013. Prepare the intangible assets section of Pacific Inc. at December 31, 2013. (No impairments are required to be recorded in 2013.)
(c) At the end of 2014, Clemons is evaluating the results of the tour business. Due to fierce competition from other online businesses, the Coastal Bike reporting unit has been losing money. Its book value is now $225,000. The fair value of the Coastal Bike reporting unit is $150,000. The implied value of goodwill is $35,000. Clemons has collected the following information related to the company's intangible assets.
Expected Cash Flows
Intangible Asset (Undiscounted) Fair Values
Trademark 45,000 16,000
Copyrights 26,000 14,000
Prepare the journal entries required, if any, to record impairments on Pacific's intangible assets. (Assume that any amortization for 2014 has been recorded.) Show supporting computations.