On January 1, 2015, Lagina Company purchased Blankenship, Inc. by paying $2,300,
ID: 2457274 • Letter: O
Question
On January 1, 2015, Lagina Company purchased Blankenship, Inc. by paying $2,300,000. At December 31, 2014, the balance sheet of Blankenship, Inc. was as follows:
Cash
$ 150,000
Accounts payable
$ 30,000
Inventory
40,000
Notes payable
400,000
Land
700,000
Common Stock
1,500,000
Buildings (net)
200,000
Retained Earnings
20,000
Equipment (net)
750,000
Franchise (net)
100,000
Patent (net)
10,000
Total assets
$ 1,950,000
Total liabilities and equity
$ 1,950,000
All fair values are equal to their book values with the following exceptions:
Land – fair value of $800,000
Buildings – fair value of $300,000
Equipment – fair value of $700,000
Franchise – fair value of $200,000
Patent – fair value of $400,000
The franchise expires on December 31, 2017 and the patents have a remaining legal life of 6 years with an estimated useful life of 4 years.
On July 1, 2015, Lagina paid $20,000 to successfully defend its patent.
During 2015, Lagina incurred $800,000 of experimental and development costs to develop a new drilling methodology. In 2016, legal fees and other costs associated with registration of the related patent totaled $18,000. A patent for this technology was granted on March 31, 2016. The patent has a legal and estimated useful life of 7 years.
Due to a change in the local regulatory climate, at the end of 2015, after recording amortization, Lagina determined it was necessary to assess impairment on the franchise. At December 31, expected future cash flows are $150,000 and estimated fair value is $130,000.
On April 1, 2016, Lagina sold the patent acquired in 2015 in exchange for $300,000 cash.
At the end of 2015, Lagina determined that there was no goodwill impairment. As part of year-end testing in 2016, Lagina collected the following information (as of December 31):
Book value of net assets (including goodwill)
$550,000
Estimated net future cash flows
$800,000
Fair value of net assets (including goodwill)
$525,000
Fair value of net assets (excluding goodwill)
$475,000
Requirements:
Compute the book value for each of the above mentioned intangible assets at December 31, 2015 and 2016.
Compute the income statement effects for 2015 and 2016 for each of the above mentioned transactions.
**Round all computations to the nearest whole dollar.
Note:
You may not need to use all titles provided below
All computations should be shown on the two pages that follow
Item
2015
Book Value
2016
Book Value
Franchise
$
$
Patent
$
$
Goodwill
$
$
Item
2015
Income Statement Effect
2016
Income Statement Effect
Amortization Expense - Franchise
$
$
Amortization Expense - Patent
$
$
Amortization Expense - Goodwill
$
$
Impairment Loss – Franchise
$
$
Impairment Loss – Goodwill
$
$
Research and Development Expense
$
$
Legal Fees Expense
$
$
Gain on Sale
$
$
Loss on Sale
$
$
Computations – 2015
Item
Book Value
Income Statement Effect
Franchise
Patents
Goodwill
Computations – 2016
Item
Book Value
Income Statement Effect
Franchise
Patents
Goodwill
Cash
$ 150,000
Accounts payable
$ 30,000
Inventory
40,000
Notes payable
400,000
Land
700,000
Common Stock
1,500,000
Buildings (net)
200,000
Retained Earnings
20,000
Equipment (net)
750,000
Franchise (net)
100,000
Patent (net)
10,000
Total assets
$ 1,950,000
Total liabilities and equity
$ 1,950,000
Explanation / Answer
tem 2015 2016 Book Value Book Value Franchise 133333.33 133333.33 Patent 333333.33 316666.67 Goodwill 0 0 Item 2015 2016 Income Statement Effect Income Statement Effect Amortization Expense - Franchise 66666.67 0.00 Amortization Expense - Patent 66666.67 16666.67 Amortization Expense - Goodwill 0 Impairment Loss – Franchise 0 133333.33 Impairment Loss – Goodwill 20000 Research and Development Expense 800000 Legal Fees Expense 20000 18000 Gain on Sale 0 Loss on Sale $ -16666.67 Computations – 2015 Item Book Value Income Statement Effect Franchise Patents Goodwill Computations – 2016 Item Book Value Income Statement Effect Franchise 133333.33 66666.67 Patents 333333.33 66666.67 Goodwill 0 20000
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