1. Acct Class 16
The Resume Bloopers
(Supposedly) these are taken from real resumes and cover letters and were printed in Fortune Magazine:
I demand a salary commiserate with my extensive experience.
I have lurnt Word Perfect 6.0 computor and spreadsheet progroms.
Received a plague for Salesperson of the Year.
Reason for leaving last job: maturity leave.
Wholly responsible for two (2) failed financial institutions.
Its best for employers that I not work with people.
Lets meet, so you can ooh and aah over my experience.
You will want me to be Head Honcho in no time.
Am a perfectionist and rarely if if ever forget details.

4. Chapter 12 intangible assets Sommers – ACCT 3311
Acct Class 22
Chapter 12 intangible assets Sommers – ACCT 3311
Chapter 1: Environment and Theoretical Structure of Financial Accounting.

5. Discussion Questions
Q12-1 What are the two main characteristics of intangible assets?
The two main characteristics of intangible assets are:
they lack physical substance.
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

6. Valuation of Intangibles
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.
Internally Created Intangibles:
Generally expensed.
Only capitalize direct costs incurred in developing the intangible, such as legal costs.

7. Example 1: Acquisition of Intangibles
Freitas Corporation was organized early in 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.

8. 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

9. 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.

10. Amortization of Intangibles
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.
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.

11. Example 2: Amortization
Janes Company provided the following information on intangible assets:
A patent was purchased from the Lou Company for $700,000 on January 1, 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.
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.

12. 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

13. Example 2: Continued
Intangible assets: Patent $490,000 * Franchise 450,000 ** Total $940,000 * (700,000 – 3*70,000) ** (500,000 – 50,000)

14. 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.

15. 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

16. 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 ( ) 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

17. Discussion Questions Q12-12 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 manage­ment 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.

18. Goodwill
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.

19. Example 4: Goodwill on Purchase
Global Corporation purchased the net assets of Local Company for $300,000 on December 31, The balance sheet of Local Company just prior to acquisition is:
FMV of Net Assets = $200,000

20. Example 4: Continued Book Value = $130,000 Fair Value = $200,000
Global Corporation purchased the net assets of Local Company for $300,000 on December 31, The value assigned to goodwill is determined as follows:
Book Value = $130,000
Revaluation
$70,000
Fair Value = $200,000
Goodwill
$100,000
Purchase Price = $300,000

21. Example 4: Continued
Global Corporation purchased the net assets of Local Company for $300,000 on December 31, The value assigned to goodwill is determined as follows:

22. Example 4: Continued Journal entry recorded by Global: Cash 15,000
Global Corporation purchased the net assets of Local Company for $300,000 on December 31, Prepare the journal entry to record the purchase of the net assets of Local.
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

23. 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.

24. 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

25. Other goodwill Issues Goodwill Write-off Bargain Purchase
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.

26. Example 6: Amortization
The following information concerns the intangible assets of Epstein Corporation:
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.
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.
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, Also, prepare the intangible asset section of the December 31, 2011 balance sheet.

27. 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

28. Comprehensive Problem