The Resume Bloopers

(Supposedly) these are taken from real resumes and cover letters and were printed in Fortune Magazine:

1. I demand a salary commiserate with my extensive experience.

2. I have lurnt Word Perfect 6.0 computor and spreadsheet progroms.

3. Received a plague for Salesperson of the Year.4. Reason for leaving last job: maturity leave.5. Wholly responsible for two (2) failed financial institutions.6. Its best for employers that I not work with people.7. Lets meet, so you can ooh and aah over my experience.8. You will want me to be Head Honcho in no time.9. Am a perfectionist and rarely if if ever forget details.

CHAPTER 12

INTANGIBLE ASSETS

Sommers – ACCT 3311

Discussion Questions

Q12-1 What are the two main characteristics of intangible

assets?

The two main characteristics of intangible assets are:

a) they lack physical substance.

b) they are not a financial instrument.

Normally classified as long-term asset.

Common types of intangibles:

Patents

Copyrights

Franchises or licenses

Trademarks or trade names

Goodwill

Purchased Intangibles: Recorded at cost. Includes all costs necessary to make the intangible asset ready

for its intended use. Typical costs include:

► Purchase price.► Legal fees.► Other incidental expenses.

Valuation of Intangibles

Internally Created Intangibles:

Generally expensed.

Only capitalize direct costs incurred in developing the intangible, such as legal costs.

Example 1: Acquisition of Intangibles

Freitas Corporation was organized early in 2011. The following expenditures were made during the first few months of the year:

Attorneys’ fees in connection with the

organization of the corporation $ 12,000

State filing fees and other incorporation costs 3,000

Purchase of a patent 20,000

Legal and other fees for transfer of the patent 2,000

Purchase of furniture 30,000

Pre-opening salaries 40,000

Total $107,000

Prepare a summary journal entry to record the $107,000 in cash expenditures.

Example 1: Continued

Organization cost expense (12+3) 15,000

Patent (20+2) 22,000

Pre-opening expenses 40,000

Furniture 30,000

Cash 107,000

Discussion Questions

Q12-2 If intangibles are acquired for stock, how is the cost of the intangible determined?

If intangibles are acquired for stock, the cost of the intangible is the fair value of the consideration given or the fair value of the consideration received, whichever is more clearly evident.

Limited-Life Intangibles:

Amortize by systematic charge to expense over useful life.

Credit asset account for amortization.

Useful life should reflect the periods over which the asset will contribute to cash flows.

Amortization should be cost less residual value.

Amortization of Intangibles

Indefinite-Life Intangibles:

No foreseeable limit on time the asset is expected to provide cash flows.

No amortization.

Must test indefinite-life intangibles for impairment at least annually.

Example 2: Amortization

Janes Company provided the following information on intangible assets:

a. A patent was purchased from the Lou Company for $700,000 on January 1, 2009. Janes estimated the remaining useful life of the patent to be 10 years. The patent was carried on Lou’s accounting records at a net book value of $350,000 when Lou sold it to Janes.

b. During 2011, a franchise was purchased from the Rink Company for $500,000. The contractual life of the franchise is 10 years and Janes records a full year of amortization in the year of purchase.

Prepare the entries necessary in 2009 and 2011 to reflect the above information. Also, prepare a schedule showing the intangible asset section of Janes’ December 31, 2011, balance sheet.

Example 2: Continued

January 1, 2009

Patent 700,000

Cash 700,000

December 31, 2009 & 2010

Amortization expense 70,000

Patent 70,000

During 2011

Franchise 500,000

Cash 500,000

December 31, 2011

Amortization expense 120,000

Franchise 50,000

Patent 70,000

Example 2: Continued

Intangible assets:

 

Patent $490,000 *

Franchise 450,000 **

Total$940,000

* (700,000 – 3*70,000)

** (500,000 – 50,000)

Example 3: Amortization & Defense

On January 2, 2011, David Corporation purchased a patent for $500,000. The remaining legal life is 12 years, but the company estimated that the patent will be useful only for eight years. In January 2013, the company incurred legal fees of $45,000 in successfully defending a patent infringement suit. The successful defense did not change the company’s estimate of useful life.

Prepare journal entries related to the patent for 2011, 2012, and 2013.

Example 3: Continued

January 2, 2011

Patent 500,000

Cash 500,000

December 31, 2011 & 2012

Amortization expense (500÷8) 62,500

Patent 62,500

January, 2013

Patent 45,000

Cash 45,000

Example 3: Continued

Calculation of revised annual amortization:

$500 Cost

$62.5 Previous annual amort ($500 ÷ 8 yrs)

x 2 years 125 Amortization to date (2011-2012) 375 Unamortized cost (balance in the

patent account)

45 Add 420 New unamortized cost

÷ 6 Estimated remaining life (8 yrs – 2 yrs)$ 70 New annual amortization

December 31, 2013

Amortization expense 70,000

Patent 70,000

Discussion QuestionsQ12-12 What is goodwill?• Goodwill should be measured initially as the excess of the fair value

of the acquisition cost over the fair value of the net assets acquired. This definition is a measurement definition but does not conceptually define goodwill.

• Goodwill is sometimes defined as one or more unidentified intangible assets and identifiable intangible assets that are not reliably measurable. Examples of elements of goodwill include new channels of distribution, synergies of combining sales forces, and a superior manage ment team.

• Goodwill may also be defined as the intrinsic value that a business has acquired beyond the mere value of its net assets whether due to the personality of those conducting it, the nature of its location, its reputation, or any other circumstance incidental to the business and tending to make it permanent. Another definition is the capitalized value of the excess of estimated future profits of a business over the rate of return on capital considered normal in the industry.

Conceptually, represents the future economic benefits arising

from the other assets acquired in a business combination that

are not individually identified and separately recognized.

Only recorded when an entire business is purchased.

Goodwill is measured as the excess of ...

cost of the purchase over the FMV of the identifiable net

assets purchased.

Internally created goodwill should not be capitalized.

Goodwill

Global Corporation purchased the net assets of Local Company for $300,000 on December 31, 2012. The balance sheet of Local Company just prior to acquisition is:

Assets Cost FMVCash 15,000$ 15,000$ Receivables 10,000 10,000 Inventories 50,000 70,000 Equipment 80,000 130,000

Total 155,000$ 225,000$

Liabilities and EquitiesAccounts payable 25,000$ 25,000$ Common stock 100,000 Retained earnings 30,000

Total 155,000$ 25,000$

FMV of Net Assets = $200,000

Example 4: Goodwill on Purchase

Book Value = $130,000

Fair Value = $200,000

Purchase Price = $300,000

Revaluation$70,000

Goodwill$100,000

Global Corporation purchased the net assets of Local Company for $300,000 on December 31, 2012. The value assigned to goodwill is determined as follows:

Example 4: Continued

Calculation of Goodwill:

Cash 15,000$

Receivables 10,000

Inventories 70,000

Equipment 130,000

Accounts payable (25,000)

FMV of identifiable net assets 200,000

Purchase price 300,000

Goodwill 100,000$

Global Corporation purchased the net assets of Local Company for $300,000 on December 31, 2012. The value assigned to goodwill is determined as follows:

Example 4: Continued

Journal entry recorded by Global:

Cash 15,000

Receivables 10,000

Inventory 70,000

Equipment 130,000

Goodwill 100,000

Accounts payable 25,000

Cash 300,000

Global Corporation purchased the net assets of Local Company for $300,000 on December 31, 2012. Prepare the journal entry to record the purchase of the net assets of Local.

Example 4: Continued

Example 5: Goodwill on Purchase

Johnson Corporation purchased all of the outstanding common stock of Smith Corporation for $11,000,000 in cash. The book value of Smith’s net assets (assets minus liabilities) was $7,800,000. The fair values of all of Smith’s assets and liabilities were equal to their book values with the following exceptions:

Book Value Fair Value

Receivables $1,300,000 $1,100,000

Property, plant, & equipment 8,000,000 9,400,000

Intangible assets 200,000 1,200,000

Calculate the amount paid for goodwill.

Example 5: Continued

Consideration exchanged $11,000,000

Less fair value of net assets:

Book value of net assets $7,800,000

Plus: Fair value in excess of book value:

Property, plant, & equipment 1,400,000

Intangible assets 1,000,000

Less: Book value in excess of fair value:

Receivables (200,000) 10,000,000

Goodwill $ 1,000,000

Goodwill Write-off

Goodwill considered to have an indefinite life.

Should not be amortized.

Only adjust carrying value when goodwill is impaired (next time).

Bargain Purchase

Purchase price less than the fair value of net assets acquired.

Amount is recorded as a gain by the purchaser.

Other goodwill Issues

Example 6: Amortization

The following information concerns the intangible assets of Epstein Corporation:

a. On June 30, 2011, Epstein completed the purchase of the Johnstone Corporation for $2,000,000 in cash. The fair value of the net identifiable assets of Johnstone was $1,700,000.

b. Included in the assets purchased from Johnstone was a patent that was valued at $80,000. The remaining legal life of the patent was 13 years, but Epstein believes that the patent will only be useful for another eight years.

c. Epstein acquired a franchise on October 1, 2011, by paying an initial franchise fee of $300,000. The contractual life of the franchise is 10 years.

Prepare year-end adjusting journal entries to record amortization expense on the intangibles at December 31, 2011. Also, prepare the intangible asset section of the December 31, 2011 balance sheet.

Example 6: Continued

Calculation of goodwill: (The cost of goodwill is not amortized.)

Consideration exchanged $2,000,000

Less: Fair value of net identifiable assets 1,700,000

$ 300,000

Amortization expense ($80,000 ÷ 8 years x 6/12) 5,000

Patent 5,000

Amortization expense ($300,000 ÷ 10 years x 3/12) 7,500

Franchise 7,500

Intangible assets:

Goodwill $300,000

Patent 75,000 $ 80,000 – 5,000

Franchise 292,500 $300,000 – 7,500 Total intangibles $667,500

Comprehensive Problem