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Chapter 12: 13Q (page 610)
Question: Why are held-to-maturity investments applicable only to debt securities?
Answer:
Held-to-maturity investments are only applicable to debt securities because equity securities do not have a maturity date.
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Question: (Goodwill, Impairment) On July 31, 2017, Mexico Company paid \(3,000,000 to acquire all of the common stock of Conchita Incorporated, which became a division of Mexico. Conchita reported the following balance sheet at the time of the acquisition.
Current assets | \) 800,000 | Current liabilities | \( 600,000 |
Noncurrent assets | 2,700,000 | Long-term liabilities | 500,000 |
Total assets | \)3,500,000 | Stockholders鈥� equity | 2,400,000 |
Total liabilities and stockholders鈥� equity | \(3,500,000 |
It was determined at the date of the purchase that the fair value of the identifiable net assets of Conchita was \)2,750,000. Over the next 6 months of operations, the newly purchased division experienced operating losses. In addition, it now appears that it will generate substantial losses for the foreseeable future. At December 31, 2017, Conchita reports the following balance sheet information.
Current assets | \( 450,000 |
Noncurrent assets (including goodwill recognized in purchase) | 2,400,000 |
Current liabilities | (700,000) |
Long-term liabilities | (500,000) |
Net assets | \)1,650,000 |
It is determined that the fair value of the Conchita Division is \(1,850,000. The recorded amount for Conchita鈥檚 net assets (excluding goodwill) is the same as fair value, except for property, plant, and equipment, which has a fair value \)150,000 above the carrying value.
Instructions
Prepare the journal entry to record the impairment loss, if any, and indicate where the loss would be reported in the income statement.
Question: Your classmate Kate believes that the equity method is applied with a strict application of the 鈥�20%鈥� rule. Do you agree? Explain.
(Comprehensive Intangible Assets) Montana Matt鈥檚 Golf Inc. was formed on July 1, 2016, when Matt Magilke purchased the Old Master Golf Company. Old Master provides video golf instruction at kiosks in shopping malls. Magik plans to integrate the instructional business into his golf equipment and accessory stores. Magik paid \(770,000 cash for Old Master. At the time, Old Master鈥檚 balance sheet reported assets of \)650,000 and liabilities of \(200,000 (thus owners鈥� equity was \)450,000). The fair value of Old Master鈥檚 assets is estimated to be \(800,000. Included in the assets is the Old Master trade name with a fair value of \)10,000 and copyright on some instructional books with a fair value of \(24,000. The trade name has a remaining life of 5 years and can be renewed at nominal cost indefinitely. The copyright has a remaining life of 40 years.
Instructions
Intangible Asset | Expected Cash Flows (undiscounted) | Fair value |
Trade names | \( 9,000 | \) 3,000 |
Copyrights | 30,000 | 25,000 |
Prepare the journal entries required, if any, to record impairments on Montana Matt鈥檚 intangible assets. (Assume that any amortization for 2018 has been recorded.) Show supporting computations.
Use the information provided in BE12-1. Assume that at January 1, 2019, the carrying amount of the patent on Taylor Swift鈥檚 books is \(43,200. In January, Taylor Swift spends \)24,000 successfully defending a patent suit. Taylor Swift still feels the patent will be useful until the end of 2026. Prepare the journal entries to record the $24,000 expenditure and 2019 amortization.
Question: Sinise Industries acquired two copyrights during 2017. One copyright related to a textbook that was developed internally at a cost of \(9,900. This textbook is estimated to have a useful life of 3 years from September 1, 2017, the date it was published. The second copyright (a history research textbook) was purchased from University Press on December 1, 2017, for \)24,000. This textbook has an indefinite useful life. How should these two copyrights be reported on Sinise鈥檚 balance sheet as of December 31, 2017?
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