E12-7B (L01,2,4) (Accounting for Trade Name) In early January 2016, Strawberry C
ID: 2573599 • Letter: E
Question
E12-7B (L01,2,4) (Accounting for Trade Name) In early January 2016, Strawberry Corporation applied for a trade name, incurring legal costs of $60,000. In January 2017, Strawberry incurred $20,000 of legal fees in a successful defense of its trade name.
Instructions
(a) Compute 2016 amortization, 12/31/16 book value, 2017 amortization, and 12/31/17 book value if the company amor- tizes the trade name over 10 years.
(b) Compute the 2017 amortization and the 12/31/17 book value, assuming that at the beginning of 2017, Strawberry determines that the trade name will provide no future benefits beyond December 31, 2020.
(c) Ignoring the response for part (b), compute the 2018 amortization and the 12/31/18 book value, assuming that at the beginning of 2018, based on new market research, Strawberry determines that the fair value of the trade name is $10,000. Estimated total future cash flows from the trade name is $18,000 on January 3, 2018.
Explanation / Answer
YEAR
a)
2016
2017
2018
AMORTIZATION
$8000
$8000
NET BOOK VALUE
$72000
$64000
b)
AMORTIZATION
$18000
NET BOOK VALUE
$54000
c)
AMORTIZATION
$6750*
NET BOOK VALUE
$57250**
*Amortization
Remaining book value – scrap value = $64000 less $10000/8years= $6750
Remaining life
NBV = $64000 - $6750= $57250
To be conservative a further $250 could be amortized in 2018 (and an additional $250 x 2 years from retained earnings)
Thus the new NBV = $ 59000, ADJUSTING FOR HINDSIGHT
$80,000 - $7000 X 3YEARS = $59000
YEAR
a)
2016
2017
2018
AMORTIZATION
$8000
$8000
NET BOOK VALUE
$72000
$64000
b)
AMORTIZATION
$18000
NET BOOK VALUE
$54000
c)
AMORTIZATION
$6750*
NET BOOK VALUE
$57250**
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