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Chapter 12: Q25. (page 610)
What is the GAAP definition of fair value?
The GAAP definition of fair value is 鈥渢he price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.鈥�
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On January 2, 2017, Raconteur Corp. reported the following intangible assets: (1) copyright with a carrying value of \(15,000, and (2) a trade name with a carrying value of \)8,500. 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 10 years.
At December 31, 2017, Raconteur assessed the intangible assets for possible impairment and developed the following information.
Estimated Undiscounted Expected Future Cash Flows | Estimated Fair Value | |
Copyright | \(20,000 | \)16,000 |
Trade name | 10,000 | 5,000 |
Accounting
Prepare any journal entries required for Raconteur鈥檚 intangible assets at December 31, 2017.
Analysis
Many stock analysts indicate a preference for less-volatile operating income measures. Such measures make it easier to predict future income and cash flows, using reported income measures. How does the accounting for impairments of intangible assets affect the volatility of operating income?
Principles
Many accounting issues involve a trade-off between the primary characteristics of relevant and representationally faithful information. How does the accounting for intangible asset impairments reflect this trade-off?
Use the information from BE17-5 but assume the stock is nonmarketable. Prepare Fairbanks鈥� journal entries to record (a) the purchase of the investment, (b) the dividends received, and (c) the fair value adjustment, if any.
On July 1, 2017, Wheeler Company purchased \(4,000,000 of Duggan Company鈥檚 8% bonds, due on July 1, 2024. The bonds, which pay interest semiannually on January 1 and July 1, were purchased for \)3,500,000 to yield 10%. Determine the amount of interest revenue Wheeler should report on its income statement for the
year ended December 31, 2017.
Columbia Sportswear Company acquired a trademark that is helpful in distinguishing one of its new products. The trademark is renewable every 10 years at minimal cost. All evidence indicates that this trademarked product will generate cash flows for an indefinite period of time. How should this trademark be amortized?
Merck and Johnson & Johnson
Question: Merck & Co., Inc. and Johnson & Johnson are two leading producers of healthcare products. Each has considerable assets, and each expends considerable funds each year toward the development of new products. The development of a new healthcare product is often very expensive, and risky. New products frequently must undergo considerable testing before approval for distribution to the public. For example, it took Johnson & Johnson 4 years and \(200 million to develop its 1-DAY ACUVUE contact lenses. Below are some basic data compiled from the financial statements of these two companies.
(all dollars in millions) | Johnson & Johnson | Merck |
Total assets | \)53,317 | \(42,573 |
Total revenue | 47,348 | 22,939 |
Net income | 8,509 | 5,813 |
Research and development expense | 5,203 | 4,010 |
Intangible assets | 11,842 | 2,765 |
Instructions
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