91Ó°ÊÓ

(Comprehensive Intangible Assets) Montana Matt’s 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 \(770,000 cash for Old Master. At the time, Old Master’s balance sheet reported assets of \)650,000 and liabilities of \(200,000 (thus owners’ equity was \)450,000). The fair value of Old Master’s 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

1. Prepare the intangible assets section of Montana Matt’s Golf Inc. on December 31, 2016. How much amortization expense is included in Montana Matt’s income for the year ended December 31, 2016? Show all supporting computations.
2. Prepare the journal entry to record amortization expenses for 2017. Prepare the intangible assets section of Montana Matt’s Golf Inc. on December 31, 2017. (No impairments are required to be recorded in 2017.)
3. At the end of 2018, Magilke is evaluating the results of the instructional business. Due to fierce competition from online and television (e.g., the Golf Channel), the Old Master reporting unit has been losing money. Its book value is now \)500,000. The fair value of the Old Master reporting unit is \(420,000. The implied value of goodwill is \)90,000. Magik has collected the following information related to the company’s intangible assets.

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’s intangible assets. (Assume that any amortization for 2018 has been recorded.) Show supporting computations.

Step by step solution

01

Meaning of Intangible assets 

Intangible assets areassets that do not have a physical form. Organizations that have spent a significant amount of money to establish brands may find that the value of their intangible assets much outweighs the worth of their physical assets.

02

(a) Preparing the intangible asset section of Montana Matt’s Golf Inc. on December 31, 2016 

MONTANA MATT’S GOLF INC. Intangibles Section of Balance Sheet December 31, 2016
Trade name	$10,000
Copyright (net accumulated amortization of $300) (Schedule 1)	23,700
Goodwill (Schedule 2)	23,700
Total intangibles	$203,700
Schedule 1 Computation of Value of Old Master Copyright
Cost of the copyright on the date of purchase	$24,000
Amortization of Copyright for 2016	(300)
Cost of the copyright on December 31	$23,700
Schedule 2 Goodwill Measurement
Purchase price
The fair value of assets is $800,000
The fair value of liabilities (200,000)
The fair value of net assets	(600,000)
The value assigned to goodwill	$170,000

Note: Amortization expense for 2016 is $300 (see Schedule 1). There is no amortization for the goodwill or the trade name, both of which are considered indefinite life intangible assets.

Working notes:

Calculation of Amortization of Copyright for 2016

$$\begin{gathered} \text{Amortization}\text{ofcopyright}=\frac{\text{Fair}\text{value}}{\text{Remaining}\text{life}}×\text{Total}\text{year} \\ \text{Amortization}\text{ofcopyright}=\frac{\$24,000}{40}×\frac{1}{2} \\ \text{Amortization}\text{ofcopyright}=\$300 \end{gathered}$$

03

(b) Preparing journal entries

Date	Particulars	Debit ($)	Credit ($)
	Amortization Expense	600
	Copyrights		600

There is a full year of amortization on the copyright. There is no amortization for the goodwill or the trade name, which are considered indefinite life intangibles.

MONTANA MATT’S GOLF INC. Intangibles Section of Balance Sheet December 31, 2017
Trade name	$10,000
Copyright (net accumulated amortization of $900) (Schedule 1	23,100
Goodwill	170,000
Total intangibles	$203,100
Schedule 1 Computation of Value of Old Master Copyright
Cost of Copyright on the date of purchase	24,000
Amortization of Copyright for 2016, 2017	(900)
Cost of the copyright on December 31	$23,100

Working notes:

Calculation of Amortization of Copyright for 2016, 2017

$$\begin{gathered} \text{Amortization}\text{of}\text{copyright}=\frac{\text{Fair}\text{value}}{\text{Remaining}\text{life}}×\text{Required}\text{years} \\ \text{Amortization}\text{of}\text{copyright}=\frac{\$24,000}{40}×1.5 \\ \text{Amortization}\text{of}\text{copyright}=\$900 \end{gathered}$$

04

(c) Preparing journal entries

Date	Particulars	Debit ($)	Credit ($)
	Loss on Impairment	$87,000
	Goodwill		$80,000
	Trade names ($10,000 – $3,000)		7,000

Working notes:

Calculating the amount of goodwill:

The fair value of the Old Master reporting unit	$420,000
Net identifiable assets (excluding goodwill) ($500,000 – $170,000)	(330,000)
The implied value of goodwill	$90,000
Total amount of goodwill	$80,000

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