CHAPTER 12
SOLUTIONS TO B PROBLEMS
PROBLEM 12-1B
Franchises ……………………………………………………………
60,000
Prepaid Rent …………………………………………………………
24,000
Retained Earnings (Net loss + R&D) ……………………….
108,000
Patents ($80,000 + $13,500) ……………………………………
93,500
Research and Development Expense ……………………..
265,000
Intangible Assets ………………………………………….
550,500
Amortization Expense ($60,000 ÷ 10) ………………………
Retained Earnings ($60,000 ÷ 10 X 10/12) ………………..
Franchises ……………………………………………………
Rent Expense ($24,000 ÷ 2) ……………………………………
12,000
Retained Earnings ($24,000 ÷ 2 X 9/12) ……………………
Prepaid Rent …………………………………………………
Amortization Expense ($80,000 ÷ 8) + ($13,500 ÷ 9) ….
11,500
Retained Earnings ($80,000 ÷ 8 X 6/12) ……………………
Patents …………………………………………………………
PROBLEM 12-2B
(a)
Costs to obtain patent Aug. 2008 ……………….
$50,400
June 3) …………………………..………………………..
2008 amortization (none – cost were after
(0)
(b)
1/1/09 carrying value of patent …………………………………
$50,400
2009 amortization ($50,400 ÷ 14) ………………………………
$3,600
(c)
1/1/13 carrying value …………………………..…………………..
$36,000
2013 amortization ($36,000 ÷ 6) ……………………………….
(6,000)
Carrying value, 12/31/13 ………………………………………….
Legal fees to defend patent 1/15 ………………………………
20,500
2014 amortization($50,500 ÷ 5) …………………………………
(10,100)
PROBLEM 12-3B
(a)
CAO CORPORATION
Intangible Assets
December 31, 2014
Franchise, net of accumulated amortization of $9,352
(Schedule 1) …………………………………………………………………….
$ 102,876
Patent, net of accumulated amortization of $1,500
(Schedule 2) …………………………………………………………………….
Trademark, net of accumulated amortization of $4,800
(Schedule 3) …………………………………………………………………….
Total intangible assets ………………………………………………..
$107,830
Schedule 1 Franchise
Cost of franchise on 1/1/14 ($30,000 + $82,228)……………………..
$ 112,228
Cost of franchise, net of amortization …………………………..
Schedule 2 Patent
Cost of patent on 7/1/14 ……………………………………………………….
$ 27,000
Amortization, 7/1/14 to 11/1/14 ($27,000 X 1/10 X 4/12) …………..
(900)
Book value on 11/1/14 …………………………………………………………
Cost of successful legal defense on 11/1/14 ………………………….
Book value after legal defense……………………………………………..
Amortization, 11/1/14 to 12/31/14 ($34,800 X 2/116) ………………..
(600)
Cost of patent, net of amortization ……………………………….
$ 34,200
Schedule 3 Trademark
Cost of securing trademark on 1/1/11 …………………………………..
$ 24,000
PROBLEM 12-3B (Continued)
(b)
CAO CORPORATION
Expenses Resulting from Selected Intangible Assets Transactions
For the Year Ended December 31, 2014
Interest expense ($82,228 X 12%) ………………………………………..
$ 9,867
Franchise amortization (Schedule 1) ……………………………………
Franchise fee ($600,000 X 8%) …………………………………………….
Patent amortization (Schedule 4) …………………………………………
Trademark amortization (Schedule 3; $24,000 X 1/20) …………..
1,200
Total intangible assets ……………………………………………….
$61,288
Note: The $115,000 of research and development costs incurred in
developing the patent would have been expensed in 2013.
Schedule 4 Patent Amortization
Amortization, 7/1/14 to 10/31/14 ($27,000 X 1/10 X 4/12) ………….
$ 900
Amortization, 11/1/14 to 12/31/14 ($34,800 X 2/116) ………………..
Total Patent amortization …………………………………………….
$ 1,500
PROBLEM 12-4B
(a) Income statement items and amounts for the year ended December 31,
2014:
Research and development expenses* ……………………..
$465,000
Amortization of patent ($180,000 ÷ 8 years) ……………….
22,500
($750,000 ÷ 25 years) …………………………………………….
Salaries and employee benefits ………………………………..
Other expenses ……………………………………………………….
(b) Balance sheet items and amounts as of December 31, 2014:
Land …………………………..…………………………………………..
$ 125,000
of $30,000) ……………………………………………………………
Patent (net of amortization of $39,375)* …………………….
Building (net of accumulated depreciation
PROBLEM 12-5B
(a) Goodwill = Excess of the cost of the division over the fair value of the
identifiable assets:
(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:
PROBLEM 12-6B
(a)
PACIFIC INC.
Intangibles Section of Balance Sheet
December 31, 2012
Trade name ………………………………………………………………………….
$ 60,000
Copyright (net accumulated amortization of
$1,000) (Schedule 1) …………………………………………………………….
Goodwill (Schedule 2) ………………………………………………………….
Total intangibles ………………………………………………………………….
$189,000
Schedule 1 Computation of Value of Coastal Bile
Copyright
Cost of copyright at date of purchase ……………………………………
Amortization of Copyright for 2012
Carrying value of copyright at December 31 ………………………….
Schedule 2 Goodwill Measurement
Purchase price …………………………………………………
$350,000
Fair value of assets …………………………..………………
Fair value of liabilities ………………………………………
Fair value of net assets …………………………….
Value assigned to goodwill ……………………………….
Amortization expense for 2012 is $1,000 (see Schedule 1). There is no
amortization for the goodwill or the trade name, both of which are
considered indefinite life intangible assets.
(b) Amortization Expense ……………………………………
2,000
Copyrights ($20,000 ÷ 10) …………………………...
2,000
PROBLEM 12-6B (Continued)
PACIFIC INC.
Intangibles Section of Balance Sheet
December 31, 2014
Trade name …………………………………………………………………………..
$ 60,000
(Schedule 1) ……………………………………………………………………….
Goodwill ………………………………………………………………………………
Total intangibles……………………………………………………………………
Copyright (net accumulated amortization of $3,000)
Schedule 1 Computation of Value of Coastal Bike
Copyright
Cost of Copyright at date of purchase ……………………………………
$ 20,000
[($20,000 ÷ 10) X 1.5 years] ………………………………………………….
Carrying value of copyright at December 31 …………………………..
(c) Loss on Impairment …………………………………………….
119,000
Goodwill ($110,000 – $35,000*) …………………………..
Trade names ($60,000 – $16,000) ……………………….
*Fair value of Coastal Bike reporting unit …….. $150,000
($225,000 – $110,000) ……………………………… (115,000)
Implied value of goodwill ………………………….. $ 35,000
The goodwill is considered impaired because the fair value of the business
unit ($150,000) is less than its carrying value ($225,000). The trade name is
also considered impaired because the expected net future cash flows