1. Yount Company has provided information on intangible assets as follows. A pat
ID: 2777173 • Letter: 1
Question
1. Yount Company has provided information on intangible assets as follows. A patent was purchased from Ford Company for $2,000,000 on January 1, 2014. Yount estimated the remaining useful life of the patent to be 10 years. The patent was carried in Ford’s accounting records at a net book value of $1,800,000 when Ford sold it to Yount.
During 2015, a franchise was purchased from Reagan Company for $960,000. In addition, 4% of revenue from the franchise must be paid to Reagan. Revenue from the franchise for 2015 was $5,000,000. Yount estimates the useful life of the franchise to be 10 years and takes a full year’s amortization in the year of purchase.
Yount incurred research and development costs in 2015 as follows.
Materials and equipment $346,000
Personnel 278,000
Indirect costs 173,000
Yount estimates that these costs will be recouped by December 31, 2018. The materials and equipment purchased have no alternative uses. On January 1, 2015, because of recent events in the field, Yount estimates that the remaining life of the patent purchased on January 1, 2014, is only 5 years from January 1, 2015.
Instructions
(a) Prepare a schedule showing the intangibles section of Yount’s balance sheet at December 31, 2015. Show supporting computations in good form.
(b) Prepare a schedule showing the income statement effect (related to expenses) for the year ended December 31, 2015, as a result of the facts above. Show supporting computations in good form.
2. Palmer, owner of Palmer Interiors, is negotiating for the purchase of Ruth Inc. The balance sheet of Ruth Inc. is given in an abbreviated form, as follows.
RUTH INC. BALANCE SHEET AS OF DECEMBER 31, 2014 Assets Liabilities and Stockholders’ Equity
Cash $ 240,000 Accounts payable $ 120,000
Land 168,000 Long-term notes payable 720,000
Building (net) 480,000 Total liabilities 840,000
Equipment (net) 420,000 Common stock $480,000
Copyright (net) 72,000 Retained earnings 60,000
Total assets $1,380,000 Total liabilities and stockholders’ equity $1,380,000
Palmer and Ruth agree that:
1. Land is undervalued by $72,000.
2. Equipment is overvalued by $12,000. Ruth agrees to sell the business to Palmer for $850,000.
Instructions: (1) Prepare the entry to record the purchase of Ruth Inc. on Palmer’s books.
(2) At the end of 2015, Palmer determines that the net assets of Ruth, now a division of his company, are 600,000. Palmer also determines that the fair value of Ruth division is 500,000. Should Palmer consider any goodwill impairment? If yes, what’s the impairment loss? (Assume all identifiable assets’ and liabilities’ book and fair value amounts are the same).
Explanation / Answer
1)Step 1
Calculating book value of patent on 31st Dec.2015
Patent worth $2,000,000 purchased from yount co. On 1st Jan 2014 with useful life of 10 years.
Amortization expenses per annum
=Cost of acquiring patent/Legal or useful life whichever is shorter
Amortization charges for 2014 is=2,000,000/10
=$200,000
Book value of patent on #1 Dec.31 2014 = Cost of acquiring patent- Amortization
=$2,000,000-200,000
=1,800,000
As on jan .2015 Estimate that the remaining life of patent is 5 years
Carrying amount of patent =$1800000
Remaining life =5
Amortization expenses per Annam = Cost of acquiring patent/legal life which ever is shorter
=1800000/5=$360000
Calculate the Book value of patent on 31st Dec.2015
Book value of patent=Carrying amount-Amortization expenses
=1800000-360000
=$1440000
Step 2
Calculate Balance of franchise purchased from Yount Co. On Dec.2015:
Franchise worth $ 5,000,000 purchased from yount Co with life of 10 years in 2015
As it has to be amortized over 10 years ,amortization expenses for 2015=$960,000/10
=$96,000
Calculate Book value of franchise on 31st Dec .2015
Book valu of franchise =cost of acquiring-amortization Expances
=960000-96000=$864000
$2304000
balance sheet Particulars amount Patent from yount Co.(step-1) $1440000 Franchise from yount Co.(step 2) $864000 Total intangible assets$2304000
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