EXERCISE 12-11 (Continued)
(b) Analysis of 2014 transactions
1. The $245,700 incurred for research and development should be
expensed.
2. The book value of Patent B is $11,250 and its estimated future
cash flows are $6,000: (3 X $2,000); therefore Patent B is
impaired. The impairment loss is imputed as follows:
Book value
$11,250
Less: Present value of future
cash flows ($2,000 X 2.57710)
Loss recognized
$ 6,096
Patent B carrying amount (12/31/14) $5,154
At December 31, 2014
Patent A
$21,900
($23,700 – [12 X $150])
Patent B
5,154
(Present value of future cash flows)
Patent C
($9,600 – [12 X $300])
Patent D
($36,480 – $1,920*)
Total
$67,614
Patent D amortization
Life in years
Life in months
Amortization per month ($36,480 ÷ 114)
$320 X 6 = $1,920
EXERCISE 12-12
Net assets of Zweifel as reported ($575,000 – $350,000)
$225,000
Adjustments to fair value
Increase in land value
30,000
Decrease in equipment value
Net assets of Zweifel at fair value
Selling price
The journal entry to record this transaction is as follows:
Cash …………………………………………………………………….
100,000
Land……………………………………………………………………..
100,000
Building ………………………………………………………………..
200,000
Equipment …………………………………………………………….
170,000
Copyright ……………………………………………………………..
30,000
Goodwill ……………………………………………………………….
100,000
Accounts Payable …………………………………………
Long-term Notes Payable ………………………………
Cash …………………………………………………………….
EXERCISE 12-13 (10–15 minutes)
(a)
Cash ………………………………………………………………………
50,000
Receivables ……………………………………………………….
90,000
Inventory …………………………..…………………………..
125,000
Land ………………………………………………………………………
60,000
Buildings ……………………………………………………….
75,000
Equipment ……………………………………………………….
70,000
Trademark ……………………………………………………….
15,000
Goodwill ……………………………………………………….
65,000*
Accounts Payable …………………………………………..
Notes Payable ………………………………………………..
Cash ……………………………………………………….
EXERCISE 12-13 (Continued)
(b)
Amortization Expense …………………………………………….
1,500
Trademarks ([$15,000 – $3,000] X 1/4 X 6/12) …………
EXERCISE 12-14 (15–20 minutes)
(a)
December 31, 2014
Loss on Impairment …………………………………..
1,100,000*
Copyrights ………………………………………..
1,100,000
*Carrying amount
(b)
Amortization Expense ……………………………….
320,000*
Copyrights ………………………………………..
320,000
*New carrying amount
Useful life
EXERCISE 12-15 (15–20 minutes)
(a)
December 31, 2014
Loss on Impairment …………………………
15,000,000
Goodwill …………………………………
15,000,000
EXERCISE 12-15 (Continued)
Fair value of division
$335,000,000
Carrying amount of division, net of goodwill
Implied value of goodwill
Carrying value of goodwill
Loss on impairment
$ 15,000,000
(b) No entry necessary. After a goodwill impairment loss is recognized,
the adjusted carrying amount of the goodwill is its new accounting
EXERCISE 12-16 (15–20 minutes)
(a) In accordance with GAAP, the $325,000 is a research and
(b)
Research and Development Expense ……………………….
110,000
Cash, Accts. Payable, etc. …………………………..
110,000
(To record research and
development costs)
Patents ……………………………………………………….
16,000
Cash, Accts. Payable, etc. …………………………..
16,000
(To record legal and administrative
costs incurred to obtain patent
Amortization Expense ……………………………………………..
Patents ……………………………………………………….
[To record one year’s amortization
EXERCISE 12-16 (Continued)
(c)
Patents ……………………………………………………….
47,200
Cash, Accts. Payable, etc. …………………………..
47,200
(To record legal cost of successfully
defending patent)
The cost of defending the patent is capitalized because the defense
was successful and because it extended the useful life of the patent.
Amortization Expense …………………………………………….
7,500
Patents ……………………………………………………….
7,500
(To record one year’s amortization
Expense:
$16,000 – $3,200 = $12,800;
$12,800 ÷ 8 =
$1,600
$47,200 ÷ 8 =
(d) Additional engineering and consulting costs required to advance the
design of a product to the manufacturing stage are R & D costs. As
indicated in the chapter it is R &D because it translates knowledge
into a plan or design for a new product.
EXERCISE 12-17 (10–12 minutes)
Depreciation of equipment acquired that will have alternate
uses in future research and development projects over
the next 5 years ($280,000 ÷ 5)
$ 56,000
Materials consumed in research and development projects
Consulting fees paid to outsiders for research and
development projects
Personnel costs of persons involved in research and
development projects
Indirect costs reasonably allocable to research and
development projects
Total to be expensed for research and
development
*Materials purchased for future R&D projects should be reported as an asset.
TIME AND PURPOSE OF PROBLEMS
Problem 12-1 (Time 15–20 minutes)
Purpose—to provide the student with an opportunity to appropriately reclassify amounts charged to a
Problem 12-2 (Time 20–30 minutes)
Purpose—to provide the student with an opportunity to compute the carrying value of a patent at three
Problem 12-3 (Time 20–30 minutes)
Purpose—the student determines the cost and amortization of a franchise, patent, and trademark and
shows how they are disclosed on the balance sheet. The student prepares a schedule of expenses
resulting from the intangibles transactions.
Problem 12-4 (Time 15–20 minutes)
Purpose—to provide the student with an opportunity to determine income statement and balance sheet
Problem 12-5 (Time 25–30 minutes)
Purpose—to provide the student with an opportunity to determine the amount of goodwill in a business
combination and to determine the goodwill impairment.
Problem 12-6 (Time 30–35 minutes)
SOLUTIONS TO PROBLEMS
PROBLEM 12-1
Franchises ……………………………………………………………
48,000
Prepaid Rent …………………………………………………………
24,000
Retained Earnings (Net loss) ………………………………….
16,000
Patents ($84,000 + $12,650) ……………………………………
96,650
Research and Development Expense
Goodwill ……………………………………………………………….
Intangible Assets ………………………………………….
Amortization Expense ($48,000 ÷ 8) ………………………..
6,000
Retained Earnings ($48,000 ÷ 8 X 6/12) ……………………
3,000
Franchises ……………………………………………………
9,000
Rent Expense ($24,000 ÷ 2) ……………………………………
12,000
Retained Earnings ($24,000 ÷ 2 X 3/12) ……………………
3,000
Prepaid Rent …………………………………………………
Amortization Expense ……………………………………………
9,170
Patents
($84,000 ÷ 10) + ($12,650 X 7/115) ………………..
Balances at 12/31/15
Prepaid Rent ($24,000 – $15,000) …………………………...
$ 9,000
Franchises ($48,000 – 9,000) ………………………………….
39,000
Patents ($96,650 – 9,170) ……………………………………….
87,480
Goodwill ……………………………………………………………….
PROBLEM 12-2
(a)
Costs to obtain patent Jan. 2008 ……………….
$59,500
2008 amortization ($59,500 ÷ 17) ………………..
(3,500)
(b)
1/1/09 carrying value of patent …………………………..
$56,000
2009 amortization ($59,500 ÷ 17) …………………………..
$3,500
2010 amortization ……………………………………………………
3,500
(7,000)
Legal fees to defend patent 12/10 …………………………..
Carrying value, 12/31/10 ………………………………………….
2012 amortization ……………………………………………………
6,500
(c)
1/1/13 carrying value ……………………………………………….
$78,000
2013 amortization ($78,000 ÷ 5) …………………………..
$15,600
2014 amortization ……………………………………………………
(46,800)
PROBLEM 12-3
(a)
SANDRO CORPORATION
Intangible Assets
December 31, 2014
Franchise, net of accumulated amortization of $5,870
(Schedule 1) …………………………………………………………………….
$ 52,830
Patent, net of accumulated amortization of $2,200
(Schedule 2) …………………………………………………………………….
Trademark, net of accumulated amortization of $6,600
(Schedule 3) …………………………………………………………………….
Total intangible assets ………………………………………………..
$107,830
Schedule 1 Franchise
Cost of franchise on 1/1/14 ($15,000 + $43,700)……………………..
$ 58,700
Cost of franchise, net of amortization …………………………..
$ 52,830
Schedule 2 Patent
Cost of securing patent on 1/2/14 …………………………………………
$ 17,600
Schedule 3 Trademark
Cost of trademark on 7/1/11 …………………………………………………
$ 36,000
Book value on 7/1/14 …………………………………………………………..
Cost of successful legal defense on 7/1/14…………………………...
10,200
Book value after legal defense……………………………………………..
Amortization, 7/1/14 to 12/31/14 ($40,800 X 1/17 X 6/12) …………
Cost of trademark, net of amortization …………………………
$ 39,600
PROBLEM 12-3 (Continued)
(b)
SANDRO CORPORATION
Expenses Resulting from Selected Intangible Assets Transactions
For the Year Ended December 31, 2014
Interest expense ($43,700 X 14%) ………………………………………..
$ 6,118
Franchise amortization (Schedule 1) ……………………………………
Franchise fee ($900,000 X 5%) …………………………………………….
Patent amortization (Schedule 2) …………………………………………
Trademark amortization (Schedule 4)…………………………………..
2,100
Total intangible assets ……………………………………………….
$61,288
Note: The $65,000 of research and development costs incurred in developing
the patent would have been expensed prior to 2014.
Schedule 4 Trademark Amortization
Amortization, 1/1/14 to 6/30/14 ($36,000 X 1/20 X 6/12) ……………
$ 900
Amortization, 7/1/14 to 12/31/14 ($40,800 X 1/17 X 6/12) ………….
1,200
Total trademark amortization ……………………………………….
$ 2,100
PROBLEM 12-4
(a) Income statement items and amounts for the year ended December 31,
2014:
Research and development expenses* ……………………..
$288,000
Amortization of patent ($88,000 ÷ 10 years) ……………….
8,800
*The research and development expenses could be listed by the
($320,000 ÷ 20 years) …………………………………………….
$ 16,000
Salaries and employee benefits …………………………..……
Other expenses …………………………..…………………………..
(b) Balance sheet items and amounts as of December 31, 2014:
Land ……………………………………………………………………….
$ 60,000
Patent (net of amortization of $15,400)* …………………….
*([$88,000 ÷ 10] X 3/4) + ($88,000 ÷ 10)
The patent was acquired for manufacturing rights rather than for use
in research and development activities. Consequently, the cost of the
patent can be capitalized as an intangible asset and amortized over its
useful life.
PROBLEM 12-5
(a) Goodwill = Excess of the cost of the division over the fair value of the
identifiable assets:
$3,000,000 – $2,750,000 = $250,000
(c) Computation of impairment:
Implied fair value of goodwill = Fair value of division less the carrying
value of the division (adjusted for fair value changes), net of goodwill:
Fair value of Conchita division ………………..
Carrying value of division ……………………….
$1,650,000
Less: Goodwill ………………………………………
(1,550,000)
Impairment loss ……………………………………..
(d) Loss on Impairment ………………………………..
$ 200,000
Goodwill ……………………………………………………….
200,000
PROBLEM 12-6
(a)
MONTANA MATT’S GOLF INC.
Intangibles Section of Balance Sheet
December 31, 2013
Trade name ……………………………………………………….
$ 10,000
Goodwill (Schedule 2) ……………………………………………………….
Total intangibles ……………………………………………………….
Schedule 1 Computation of Value of Old Master
Copyright
Cost of copyright at date of purchase …………………………..
$ 24,000
Amortization of Copyright for 2013
Cost of copyright at December 31 …………………………..
$ 23,700
Schedule 2 Goodwill Measurement
Purchase price …………………………………………………
$770,000
Fair value of assets …………………………………………..
Fair value of liabilities ………………………………………
Fair value of net assets …………………………….
(600,000)
Value assigned to goodwill ……………………………….
$170,000
Amortization expense for 2013 is $300 (see Schedule 1). There is no amor-
tization for the goodwill or the trade name, both of which are considered
indefinite life intangible assets.
(b) Amortization Expense ……………………………………
600
Copyrights ($24,000 ÷ 40) …………………………..
PROBLEM 12-6 (Continued)
MONTANA MATT’S GOLF INC.
Intangibles Section of Balance Sheet
December 31, 2014
Trade name ……………………………………………………….………………….
$ 10,000
Goodwill ………………………………………………………………………………
Total intangibles……………………………………………………………………
Schedule 1 Computation of Value of Old Master
Copyright
Cost of Copyright at date of purchase …………………………..
Cost of copyright at December 31 …………………………..
(c) Loss on Impairment …………………………………………….
87,000
Goodwill ($170,000 – $90,000*) …………………………..
80,000
Trade names ($10,000 – $3,000) …………………………
7,000
*Fair value of Old Master reporting unit ……….. $420,000
Implied value of goodwill ………………………….. $ 90,000
TIME AND PURPOSE OF CONCEPTS FOR ANALYSIS
CA 12-1 (Time 20–25 minutes)
Purpose—to provide the student with an opportunity to determine the proper classification of certain
expenditures related to organizing a business. The student is required to deal with such issues as costs
CA 12-2 (Time 25–30 minutes)
Purpose—to present an opportunity for the student to discuss accounting for patents from a theoretical
and a practical viewpoint. The student is required to explain the “discounted value of expected net
receipts” method of accounting for patents and to provide support for using cost as the generally
student to present theoretical support and practical application beyond that presented in the text.
CA 12-3 (Time 25–30 minutes)
Purpose—to provide the student with an opportunity to discuss the theoretical support for and practical
CA 12-4 (Time 20–25 minutes)
Purpose—to provide the student with an opportunity to examine the ethical issues related to expensing
research and development costs.
SOLUTIONS TO CONCEPTS FOR ANALYSIS
CA 12-1
Interest on mortgage bonds. An amount equal to the interest cost incurred in 2013 ($720,000) is a
cost which can be associated with the normal construction period and can be regarded as a normal
element of the cost of the physical assets of the shopping center because the construction period would
have ended at the end of the year if the tornado had not occurred. The decision to use debt capital to
Note that interest must be capitalized in this situation (see chapter 10) because the building requires a
period of time to get it ready for its intended use.
The amount of interest cost for the first nine months of 2014 is the measure of the 2014 loss resulting
from the tornado. The extension of the construction period to October 2014 because of the tornado
Cost of obtaining tenants. Both the 2013 and 2014 costs of obtaining tenants should be expensed as
incurred. The cost of obtaining tenants is a start-up cost. The accounting for start-up costs is
straightforward—expense these costs as incurred. The profession recognizes that these costs are
Promotional advertising. The profession has concluded that, except in limited situations, future benefits
from advertising are not sufficiently defined or measurable with a degree of reliability that is required to
CA 12-2
(a) A dollar to be received in the future is worth less than a dollar received today because of an
interest or discount factor—often referred to as the time value of money. The discounted value of
CA 12-2 (Continued)
intervals, each expected future receipt would have to be multiplied by the present value of 1 for the
number of periods of delay expected. In each case some interest rate (discount factor) per period
must be assumed and used. As an example, if receipts of $10,000 are expected each six months
over the next ten years and an 8% annual interest rate is selected, the present value of the twenty
Adding the results of these three calculations yields a total of $41,441 (rounded), considerably less
than the $45,000 total collections, again due to the discount factor.
(c) The basis of valuation for patents that is generally accepted in accounting is cost. Evidently the
cartons were developed and the patents obtained directly by the client corporation. Those costs
related to the research and development of the cartons must be expensed in accordance with
(d) Intangible assets represent rights to future benefits. The ideal measure of the value of intangible
assets is the discounted present value of their future benefits. For Ferry Company, this would
(e) The amortization policy is implied in the definition of intangible assets as rights to future benefits.
As the benefits are received by the firm, the cost or other value should be charged to expense or
(f) The litigation can and should be mentioned in notes to the financial statements. Some indication of
the expectations of legal counsel in respect to the outcome can properly accompany the statements.
It would be inappropriate to record a contingent asset reflecting the expected damages to be