Midterm 1 - Ch. 12 Questions PDF

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Midterm 1 - Chapter 12 Questions Goodwill 1. (Accounting for Goodwill) Carswell Manufacturing Company decided to expand further by purchasing Fisher Company. The balance sheet of Fisher Company as of December 31, 2011 was as follows:

Assets Cash Receivables 800,000 Inventory 835,000 Plant Assets (net) Total Assets

Fish Company Balance Sheet December 31, 2011 Equities $210,000 Accounts Payable $325,000 450,000 Common Shares 275,000 1,025,000 $1,960,000

Retained Earnings Total Equities

$1,960,000

An appraisal, agreed to by the parties, indicated that the fair market value of the inventory was $320,000 and that the fair market value of the plant assets was $1,225,000. The fair market value of the receivables is equal to the amount reported on the balance sheet. The agreed purchase price was $3 million, and this amount was paid in cash to the previous wonders of Fisher Company. The $3 million includes $100,000 paid for Fisher’s internally developed customer lists. Determine the amount of goodwill (if any) implied in the purchase price of $3 million and provide the journal entries. 1) Determine the Purchase Price = $3,000,000 ● Purchase Price = $3,000,000 2) Determine the Fair Value of Assets = $2,305,000 ● Cash = $210,000 ● A/R = $450,000 ● Inventory = $320,000 ● Plant Assets = $1,225,000 ● Intangible Asset (Customer List) = $100,000 3) Determine the Fair Value of Liabilities LESS Liabilities Assumed = $325,000 ● A/P = $325,000 Goodwill

Journal Entry Cash A/R Inventory Plan Assets Intangible Assets Goodwill A/P Cash

= Purchase Price - [FV of Assets - FV of Liabilities] = $3,000,000 - [$2,305,000 - $325,000] = $1,020,000 210,000 450,000 320,000 1,225,000 100,000 1,020,000 325,000 3,000,000

*If goodwill is negative, then the journal entry will be a gain (on the income statement) because the company is gaining more in assets then it is paying for the company. Cash

XXX

A/R Inventory Plan Assets Intangible Assets A/P Cash Gain

XXX XXX XXX XXX XXX XXX XXX

2. (Goodwill Impairment) The following is net asset information for the Dhillon Division of Klaus Inc.: Net Assets As at December 31, 2020 (in millions)

Cash Accounts receivable Property, plant, and equipment (net) Goodwill Less: Notes payable Net assets

Book Value $50 216 2,618 206 (2,700) $390

Fair Value Excluding Goodwill $50 216 2,760 (2,700)

The purpose of the Dhillon Division (also identified as a reporting unit or cash-generating unit) is to develop a nuclear-powered aircraft. If successful, travelling delays that are associated with refuelling could be greatly reduced, and operational efficiency would increase significantly. To date, management has not had much success and is deciding whether a writedown is appropriate at this time. Management has prepared the following estimates for the reporting unit or cash-generating unit: 1. Undiscounted future net cash flows are approximately $400 million 2. Future value in use is approximately $385 million 3. Sale of the unit would yield $346 million and selling costs would total $5 million a) Under ASPE, determine if there is any impairment and prepare any necessary entry on December 31, 2020. Loss on Impairment 44 million Accumulated Impairment Losses - Goodwill Carrying amount (including goodwill) Fair value of unit

44 million

390 million 346 million 44 million

b) Under IFRS, determine if there is an impairment and prepare any necessary entry on December 31, 2020. Impairment under IFRS Loss on Impairment 5 million Accumulated Impairment Losses - Goodwill Carrying amount (including goodwill) Recoverable amount

5 million

390 million 385 million* 5 million

*Recoverable amount: Higher of VIU of 385 and [FV - Disposal Costs] of 341 (346 - 5) d) On December 31, 2021, it is estimated that the cash-generating unit’s fair value has increased to $400 million. Under IFRS, prepare the journal entry, if any, to record the increase in fair value. Reversal of goodwill impairment losses is not permitted under iFRS. (or under ASPE).

VIU - the present value of the asset’s future cash flows from use and eventual sale.

Impairment Tables 1. (Impairment Tables) Using the data below, complete the following tables, applying IFRS & ASPE. Limited-Life Intangible Assets

Indefinite-Life Intangible Assets (excluding Goodwill)

Goodwill [the values below pertain to the Cash-Generating-Unit, including its Goodwill]

Carrying amounts

$4,000,000

$5,000,000

$16,000,000

Fair value

3,400,000

4,500,000

15,500,000

Undiscounted future cash flows from use and eventual sale

3,8000,000

4,8000,000

14,500,000

Present value of the future cash flows from use and eventual sale

3,000,000

4,350,000

12,800,000

Costs to sell

20,000

20,000

250,000

a) Fill out the following table using IFRS.

Is the asset impaired? Show supporting calculations

Limited-Life Intangible Assets

Indefinite-Life Intangible Assets (excluding Goodwill)

Goodwill [the values below pertain to the CashGenerating-Unit, including its Goodwill]

Recoverable Amount = FV Cost to Sell = $3,4000,000 $20,000 = $3,380,000

Recoverable Amount = FV Cost to Sell = $4,500,000 $20,000 = $4,480,000

Recoverable Amount = FV Cost to Sell = $15,500,000 $250,000 = $15,200,000

Yes, carrying amount (4,000,000) is greater than recoverable amount (3,380,000)

Yes, carrying amount ($5,000,000) is greater than recoverable amount (4,480,000)

Yes, carrying amount ($15,500,000) is greater than recoverable amount (15,250,000)

If the asset is deemed to be impaired, what is the amount of the impairment loss to be recognized in the income statement? Show supporting calculations.

Impairment = Carrying amount - recoverable amount = 4,000,000 - 3,380,000 = $620,000

Impairment = Carrying Amount - recoverable amount = 5,000,000 - 4,480,000 =$520,000

Impairment = CA - RA = 16,000,000 - 15,250,000 = $750,000

Can an impairment loss reversal be recognized in a subsequent period, and if so, is there a limit to the reversal? Assume the company uses the cost model (i.e., not the revaluation model) subsequent to acquisition.

Yes, however, it is limited to the carrying amount less the amortization or depreciation had the asset not been impaired

Yes, you can reverse because there is no accumulated amortization all the way up the carrying amount had impairment not have occured

No.

b) Full out the following table using ASPE.

Is the asset impaired? Show supporting calculations

Limited-Life Intangible Assets

Indefinite-Life Intangible Assets (excluding Goodwill)

Goodwill [the values below pertain to the CashGenerating-Unit, including its Goodwill]

Undiscounted Free Cash Flow = $3,800,000

Fair Value = 4,500,000

Fair Value = $15,500,000

Yes, carrying amount (5,000,000) is greater than fair value (4,500,000)

Yes, carrying amount (16,000,000) is greater than fair value (15,500,000)

Yes, carrying amount is (4,000,000) is greater than undiscounted FCF (3,800,000) If the asset is deemed to be impaired, what is the amount of the impairment loss to be recognized in the income statement? Show supporting calculations.

Impairment = Carrying amount - Fair value = 4,000,000 - 3,400,000 = $600,000

Impairment = carrying amount - fair value = 5,000,000 - 4,500,000 = $500,000

Impairment = carrying amount fair value = 16,000,000 - 15,500,000 = $500,000

Can an impairment loss reversal be recognized in a subsequent period, and if so, is there a limit to the reversal? Assume the company uses the cost model (i.e., not the revaluation model) subsequent to acquisition.

No, under ASPE, an impairment loss shall not be reversed if fair value subsequently increases

No, under ASPE, an impairment loss shall not be reversed if fair value subsequently increases

No, under ASPE, an impairment loss shall not be reversed if fair value subsequently increases

Intangible Assets 1. (Accounting for Purchase of New Software) Programming for Kids Ltd. decided that it needed to update its computer programs for its supplier relationships. It purchased an off-the-shelf program and modified it internally to link it to Programming for Kids’ other programs. The following costs may be relevant to the accounting for the new software: Original cost of old software Accumulated amortization of old software Purchase price of new software Training costs General and administrative costs Direct cost of in-house programmer’s time spent on modifying software Prepare the journal entry to record the software replacement. Intangible Assets - Software (New) Loss on Disposal of Intangible Assets Cash Intangible Assets - Software (Old) *$7,5000 + $1,480 = $8,980

8,980* 2,000 8,980 2,000

$10,000 8,000 7,500 4,000 2,480 1,480

2. (Correction of Intangible Asset Account) As the recently appointed auditor for Dalera Corporation, you have been asked to examine selected accounts before the six-month financial statement of June 30, 2020, are prepared. The controller for Dalera Corporation mentions that only one account is kept for intangible assets. The entries Assets since January 1, 2020, are as follows: Intangible Assets Jan.

4 5

Feb. Apr. June

11 30 1 30

Research costs Legal costs to obtain patent Payment of seven month’s rent on property leased by Daleara (Feb to Aug) Proceeds from issue of common shares Promotional expenses related to start-up of business Development stage costs (meet all six development stage criteria) Start-up costs for first six months of operations

Debt 1,050,000 45,000

Credit

49,000

Balance 1,050,000 1,095,000

157,000

1,144,000 848,000 1,005,000

215,000 316,000

1,220,000 1,536,000

296,000

Prepare the entry or entries needed to correct this account. Assume that the patent has a useful life of 10 years and that Daleara Corporation follows IFRS. Research and Development Expense Intangible Assets - Development Costs Intangible Assets - Patents Rent Expense [(5 / 7) X $49,000] Prepaid Rent [(2 / 7) X $49,000] Advertising Expense Start-Up Expense Common Shares Intangible Assets

1,050,000 215,000 45,000 35,000 14,000 157,000 316,000 296,000 1,536,000

Amortization Expense 2,250 Accumulated Amortization - Patents [($45,000 / 10) X 6/12]

2,250

Note: If ASPE was followed the company may choose to expense the intangible assets - development costs of $215,000. This would increase total expenses and decrease the intangible assets - development costs by the same amount ($215,000). 3. (Accounting for Customer Lists) We-Market Inc acquired the customer list of a large newspaper for $6 million on January 1, 2020. The customer list is a database that includes customer names, contact information, order history, and demographic information. We-Market expects to benefit from the information on the acquired list for 10 years, and it believes that these benefits will be spread evenly over the 10 years. In this case, assume the customer list is a limited life intangible that should be amortized on a straight-line basis. Customer lists like this one would typically have a limited life due to factors such as people moving into or out of the area and competition from other newspapers and other media sources. Provide the journal entries needed to record the purchase of the customer list and its amortization at the end of each year. January 1, 2020 Intangible Assets - Customer List Cash

6,000,000

December 31, 2020 - through December 31, 2029 Amortization Expense 600,000 Accumulated Amortization - Customer List

6,000,000

600,000

4. (Accounting for Patent Amortization) Assume that on January 1, 2020, Harcott Ltd. either pays $180,000 to acquire a patent or incurs $180,000 in legal costs to successfully defend an internally developed patent. Further, assume that the patent has a remaining useful life of 12 years and is amortized on a straight-line basis. What journal entries should be made to record the $180,000 expenditure on January 1, 2020, and amortization at the end of each year? January 1, 2020 Intangible Assets - Patents Cash

180,000 180,000

December 31, 2020 Amortization Expense 15,000 Accumulated Amortization - Patents

15,000

Impairment 1. (Impairment Testing) At the end of 2020, Dayton Corporation owns a licence with a remaining life of 10 years and a carrying amount of $530,000. Dayton expects undiscounted future cash flows from this licence to toal $525,000. The licence’s fair value is $425,000 and disposal costs are estimated to be nil. The licence’s discounted cash flows (that is, value in use) are estimated to be $475,000. Dayton prepares financial statements in accordance with IFRS. a) Determine if the licence is impaired at the end of 2020 and prepare any related entries that are necessary. IFRS: Impairment = Carrying Amount - Recoverable Amount = $530,000 - $475,000 = $55,000 Loss on Impairment 55,000 Accumulated Impairment 55,000 After this journal entry on 31/12/2020 the asset’s carrying amount = $475,000 [$530,000 - $55,000] b) Assume the recoverable amount is calculated to be $450,000 at the end of 2021. Determine if the licence is impaired at the end of 2021 and prepare any related entries that are necessary. In 2021, the Carrying Amount would have been $530,000 - $53,000 = $477,000. Thus, in this case there would be a reversal since (i) the recoverable amount of $450,000 is less than $477,000 and (ii) the recoverable amount of $450,000 is greater than the carrying amount fo $427,500 (Carrying amount at end of 2021 = 475,000 - 47,500 [2021’s amortization: 475,000 / 10] = $427,500) Therefore, the carrying amount can be increased to $450,000 [the lower of $450k and $477k]. Reversal = 450,000 - 427,500 = $22,500. Accumulated Impairment Losses - Licenses Recovery of Loss from Impairment

22,500 22,500

c) Explain how the answer to part (b) would change if the licence’s fair value were $500,000 at the end of 2021. If the licence’s fair value is $500,000 at the end of 2021, the recoverable amount at the end of 2021 would be $500,000 (since recoverable amount is the higher of value in use and fair value less cost to sell). However, the licence cannot be increased in value to more than what its carrying amount would have been, net of amortization, if the original impairment loss had never been recognized (i.e. $530,000 = $53,000 amortization = $477,000). Therefore the carrying amount can be increased to $477,000. Reversal = $477,000 = $427,500 = $49,500. Accumulated Impairment Losses - Licenses Recovery of Loss from Impairment

49,500 49,500

2. (Impairment Testing) Repeat E12.13, but now assume that Dayton prepares financial statements in accordance with ASPE, and that the recoverable amount under ASPE (undiscounted future cash flows) is calculated to be $500,000 at the end of 2021. Part A Under ASPE, for a limited-life asset, the undiscounted future cash flows are compared to the carrying amount. In this case, there is no impairment loss under ASPE since: Recoverable amount (undiscounted future cash flows) of $535,000 > Carrying amount of $530,000 Part B Recoverable amount (undiscounted future cash flows) of $500,000 > Carrying amount of $477,000 ($530,000 = $53,000 amortization) at the end of 2021, therefore there is no impairment loss under ASPE. In any case, reversal of impairment losses on PP&E, Intangible Assets, and Goodwill is not permitted under ASPE. Part C The answer to part (b) would not change if the licence’s fair value is $500,000 because under ASPE, the impairment test compares carrying amount of the asset to undiscounted future cash flows. The impairment test is not affected by the fair value of the licence. 3. (Impairment Testing) Repeat E12.13, but now assume that the licence was granted in perpetuity and has an indefinite life. Part A Loss on Impairment 55,000 Accumulated Impairment Losses - Licences

55,000

Part B Recoverable amount of $450,000 < Carrying amount of $475,000. An impairment loss of $25,000 would be recorded. The journal entry under IFRS would be: Loss on Impairment 25,000 Accumulated Impairment losses - Licences 25,000 Part C Reversal = $500,000 - $475,000 = $25,000 Accumulated Impairment Losses - Licences Recovery of Loss from Impairment

25,000 25,000

4. (Impairment Testing) Repeat E12.13, but now assume that the licence was granted in perpetuity and has an indefinite life, and that Dayton prepares financial statements in accordance with ASPE. Part A Fair value of $425,000 < Carrying amount of $530,000. The impairment loss of $105,000 would be recorded. Loss on Impairment 105,000 Accumulated Impairment Losses - Licences 105,000 Part B Under ASPE, the recoverable amount refers to undiscounted future cash flows, which does not affect the impairment test for indefinite-life intangible assets. In any event, under ASPE, reversal of impairment losses on PP&E, Intangible Assets, and Goodwill is not permitted. Part C Under ASPE, reversal of impairment losses on PP&E, Intangible Assets, and Goodwill is not permitted.

Classification of Intangibles 1. (Classification Issues - Intangibles) The following is a list of items that could be included in the intangible asset section of the statement of financial position: 1. An investment in a subsidiary company 2. Timberland 3. The cost of an engineering activity needed to advance a product’s design to the manufacturing stage 4. A lease prepayment (six months of rent paid in advance) 5. The cost of equipment obtained under a capital lease 6. The cost of searching for applications for new research findings 7. Costs incurred in forming a corporation 8. Operating losses incurred in the start-up of a business 9. Training costs incurred in the start-up of a new operation 10. The purchase cost of a franchise 11. Goodwill generated internally 12. The cost of testing in the search for product alternatives 13. Goodwill acquired in the purchase of a business 14. The cost of developing a patent 15. The cost of purchasing a patent from an inventory 16. Legal costs incurred in securing a patent 17. Unrecovered costs of a successful legal suit to protect a patent 18. The cost of conceptual formulation of possible product alternatives 19. The cost of purchasing a copyright 20. Product development costs 21. Long-term receivables 22. The cost of developing a trademark 23. The cost of purchasing a trademark 24. The cost of an annual update of payroll software 25. A five-year advertising contract for rights of advertising by a top hockey player in Canada 26. Borrowing costs specifically identifiable with an internally developed intangible asset a) Indicate which items on the list would be reported as intangible assets on the statement of financial position. 3, 10, 15, 16, 18, 19, 20, 23, 25, 26 b) Indicate how, if at all, the items that are not reportable as intangible assets would be reported in the financial statements. 1. Long-term investments on the statement of financial position 2. Biological asset on the statement of financial position 4. Current asset (prepaid rent) on the statement of financial position 5. Property, plant, and equipment on the statement of financ...