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Chapter 12: 12-13Q (page 637)

Under what circumstances is it appropriate to record goodwill in the accounts? How should goodwill, properly recorded on the books, be written off in order to conform with generally accepted accounting principles?

Short Answer

Expert verified

When goodwill is gained through purchase, it is recorded in the accounts. Goodwill is not amortized but tests for installation a minimum of one time in a year.

Step by step solution

01

Written off of Goodwill

Goodwill may be amortized in a straight-line fashion over a ten-year period. If the value of the asset decreases over time, as it did in the case of Autonomy's goodwill, an impairment charge is necessary.

02

When to record Goodwill

When goodwill is gained through purchase, it is recorded in the accounts. Because goodwill obtained in a corporate combination has an infinite life, it should not be amortized but should be tested for installation at least once a year.

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Most popular questions from this chapter

Question: Indicate whether the following items are capitalized or expensed in the current year.

  1. Purchase cost of a patent from a competitor.
  2. Research costs.
  3. Development costs (after achieving economic viability).
  4. Organizational costs.
  5. Costs incurred internally to create goodwill.

Indicate how unrealized holding gains and losses should be reported for debt investments classified as trading, available-for-sale, and held-to-maturity.

Question: As the recently appointed auditor for Bryan Corporation, you have been asked to examine selected accounts before the 6-month financial statements of June 30, 2017, are prepared. The controller for Bryan Corporation mentions that only one account is kept for intangible assets. The account is shown below.

Intangible assets

Debit

Credit

Balance

Jan. 4

Research and development costs

940,000

940,000

Jan. 5

Legal costs to obtain patent

75,000

1,015,000

Jan. 31

Payment of 7 months鈥� rent on property leased by Bryan

91,000

1,106,000

Feb. 11

Premium on common stock

250,000

856,000

March 31

Unamortized bond discount on bonds due March 31, 2037

84,000

940,000

April 30

Promotional expenses related to start-up of business

207,000

1,147,000

June 30

Operating losses for first 6 months

241,000

1,388,000

Instructions

Prepare the entry or entries necessary to correct this account. Assume that the patent has a useful life of 10 years.

Question: Why are held-to-maturity investments applicable only to debt securities?

Use the information in IFRS12-6. Assume that at the end of the year following the impairment (after recording amortization expense), the estimated recoverable amount for the patent is \(130,000. Prepare Kenoly鈥檚 journal entry, if needed.

Kenoly Corporation owns a patent that has a carrying amount of \)300,000. Kenoly expects future net cash flows from this patent to total \(210,000 over its remaining life of 10 years. The recoverable amount of the patent is \)110,000. Prepare Kenoly鈥檚 journal entry, if necessary, to record the loss on impairment.
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