Module 2

Question 1

Truffle Inc. acquired a patent on January 1, 2018 for $7,800,000. It was expected to have a 10 year life and no residual value. Truffle uses straight-line amortization for its patents. On December 31, 2021, the expected future cash flows from the patent are $518,000 per year for the next six years. The present value of these cash flows, discounted at Truffle’s market interest rate, is $2,120,000.

What amount, if any, of impairment loss will be reported on Truffle’s 2021 income statement?

Answer 1

$2,560,000
A patent is a limited-life intangible asset. Therefore, Truffle must first perform a recoverability test to determine if an impairment exists. To calculate if an impariment exists, the company must compare the “undiscounted” sum of future cash flows to the current book value. Book value of the patent is calculated as: $7,800,000 - ($780,000 x 4) = $4,680,000. Sum of expected cash flows is $3,108,000 ($518,000 x 6 years). Since an impairment exists, Truffle must now measure the impairment using the fair value test. The amount of impairment loss is the difference between the fair value of the asset and the carrying value of the asset. The fair value is the present “discounted” value of future cash flows. The impairment loss is calculated as: $4,680,000 - $2,120,000 = $2,560,000.

Question 2

Coral Corporation began operating as a business in 2020. During January 2020, the company paid $300,000 in design costs to develop its trademark and $250,000 in legal and registration fees to secure the trademark. During October 2020, the company successfully defended its trademark, paying an additional $150,000 in legal fees during the process. At what amount should Coral Corporation report its trademark on its December 31, 2020 balance sheet?

Answer 2

$700,000
Direct costs associated with an internally developed intangible assets are capitalized, but not amortized. These costs include attorney fees, registration fees, design costs, consulting fees, and legal defense costs. Therefore, Coral should report the value of the trademark at $700,000 ($300,000 + $250,000 + $150,000).

Question 3

Bryson Corporation purchased a limited-life intangible asset for $1,162,500 on May 1, 2018. It has a remaining useful life of 15 years. What total amount of amortization expense should have been recorded on the intangible asset by December 31, 2020 (if necessary, round your answer to the nearest dollar)?

Answer 3

$206,667
Intangible assets are amortized using the straight-line method over the useful life of the asset. On December 31, 2020, the asset would be amortized for 32 months [8 month in 2018 + 12 months in 2019 + 12 months in 2020]. $1,162,500 / 180 months = monthly amortization of $6,458.33 x 32 months = $206,667 total amortization expense.

Question 4

Which method of amortization is normally used for intangible assets?

Answer 4

straight line

Question 5

Easton Company and Lofton Company were combined as result of a purchase transaction. Easton was able to acquire Lofton at a bargain price. The sum of the fair values of identifiable assets acquired less the fair value of liabilities assumed exceeded the cost of acquiring Easton.

How will Easton report the excess amount?

Answer 5

As a gain
When a company purchases another company and the fair value of the assets is lower than the purchase price, Goodwill is created and recorded on the purchaser’s balance sheet. However, when a company receives assets that have a greater value than the amount paid for those assets, a gain is recognized and recorded on the purchaser’s income statement. In this case, Easton acquired the assets of Lofton at a bargain price. (The value of the assets exceeds the price paid). Therefore, the excess amount is recorded as a gain by Easton.