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Chapter 9: Q9-34PGA (page 534)

Accounting for intangibles

Midland States Telecom provides communication services in Iowa, Nebraska, the Dakotas, and Montana. Midland States Telecom purchased goodwill as part of the acquisition of Sheldon Wireless Enterprises, which had the following figures:

Book value of assets \( 900,000

Market value of assets 1,400,000

Market value of liabilities 530,000

Requirements

1. Journalize the entry to record Midland States Telecom鈥檚 purchase of Sheldon Wireless for \)440,000 cash plus a $660,000 note payable.

2. What special asset does Midland States Telecom鈥檚 acquisition of Sheldon Wireless identify? How should Midland States Telecom account for this asset after acquiring Sheldon Wireless? Explain in detail.

Short Answer

Expert verified

Answer

Goodwill is $230,000

Step by step solution

01

Meaning of Intangible Assets

The assets that increase the value of the business organization even without physical existence are known as intangible assets. Goodwill and patents are some of the intangible assets.

02

Record journal entries

Date

Accounts & Explanation

Debit ($)

Credit ($)

Assets

1,400,000

Goodwill (refer working note)

230,000

Liabilities

530,000

Cash

440,000

Notes Payable

660,000

(To record purchase of Sheldon wireless)

Working note: Calculation of Goodwill

Particulars

Amount ($)

Purchase Price to acquire Sheldon Wireless ($440,000+$660,000)

$1,100,000

Market value of Sheldon Wireless Assets $1,400,000

Less: Market value of Sheldon Wireless Liabilities (530,000)

870,000

Goodwill

$230,000

03

Special asset identified in acquisition 

Midland State Telecom will identify goodwill on the acquisition of Sheldon wireless. This goodwill arises because Midland has paid an amount of consideration that is more than the market value of the net assets of the Sheldon wireless.

Midland State Telecom will report goodwill of $230,000 on the balance sheet.

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Most popular questions from this chapter

Changing an asset鈥檚 useful life and residual value Salem Hardware Consultants purchased a building for \(540,000 and depreciated it on a straight-line basis over a 40-year period. The estimated residual value is \)100,000.

After using the building for 15 years, Salem realized that wear and tear on the building would wear it out before 40 years and that the estimated residual value should be $88,000.

Starting with the 16th year, Salem began depreciating the building over a revised total life of 35 years using the new residual value. Journalize depreciation expense on the building for years 15 and 16.

Recording partial-year depreciation and sale of an asset On January 2, 2017, Comfy Clothing Consignments purchased showroom fixtures for \(17,000 cash, expecting the fixtures to remain in service for five years. Comfy has depreciated the fixtures on a double-declining-balance basis, with zero residual value. On October 31, 2018, Comfy sold the fixtures for \)7,600 cash. Record both depreciation expense for 2018 and sale of the fixtures on October 31, 2018.

Alpha Communication purchased equipment on January 1, 2018, for \(27,500. Suppose Alpha Communication sold the equipment for \)20,000 on December 31, 2020. Accumulated Depreciation as of December 31, 2020, was $10,000. Journalize the sale of the equipment, assuming straight-line depreciation was used.

Question:Jim Reed manages a fleet of utility trucks for a rural county government. He鈥檚 been in his job for 30 years, and he knows where the angles are. He makes sure that when new trucks are purchased, the residual value is set as low as possible. Then, when they become fully depreciated, they are sold off by the county at residual value. Jim makes sure his buddies in the construction business are first in line for the bargain sales, and they make sure he gets a little something back. Recently, a new county commissioner was elected with vows to cut expenses for the taxpayers. Unlike other commissioners, this man has a business degree, and he is coming to visit Jim tomorrow.

Requirements

1. When a business sells a fully depreciated asset for its residual value, is a gain or loss recognized?

2. How do businesses determine what residual values to use for their various assets? Are there 鈥渉ard and fast鈥� rules for residual values?

3. How would an organization prevent the kind of fraud depicted here?

How does a business decide which depreciation method is best to use?
See all solutions

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