ACC 304: Intermediate Accounting I
Assignment: Week Seven
Intangible Assets Exercises
Exercise #1
Presented below is selected information related to Martin Burke Inc. at year-end. All these accounts have
debit balances. Instructions:
Identify which items should be classified as an intangible asset. For those items not classified as an
intangible asset, indicate where they would be reported in the financial statements. Exercise #2
The following is selected information for Alatorre Company.
1. Alatorre purchased a patent from Vania Co. for $1,000,000 on January 1, 2015. The patent is being
amortized over its remaining legal life of 10 years, expiring on January 1, 2025. During 2017,
Alatorre determined that the economic benefits of the patent would not last longer than 6 years from
the date of acquisition. What amount should be reported in the balance sheet for the patent, net of
accumulated amortization, at December 31, 2017?
2. Alatorre bought a franchise from Alexander Co. on January 1, 2016, for $400,000. The carrying
amount of the franchise on Alexander’s books on January 1, 2016, was $500,000. The franchise
agreement had an estimated useful life of 30 years. Because Alatorre must enter a competitive
bidding at the end of 2018, it is unlikely that the franchise will be retained beyond 2025. What
amount should be amortized for the year ended December 31, 2017?
3. On January 1, 2017, Alatorre incurred organization costs of $275,000. What amount of organization
expense should be reported in 2017?
1 4. Alatorre purchased the license for distribution of a popular consumer product on January 1, 2017,
for $150,000. It is expected that this product will generate cash flows for an indefinite period of time.
The license has an initial term of 5 years but by paying a nominal fee, Alatorre can renew the
license indefinitely for successive 5-year terms. What amount should be amortized for the year
ended December 31, 2017?
Answer the questions asked about each of the factual situations. Exercise #3
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. 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. It is determined that the fair value of the Conchita Division is $1,850,000. The recorded amount for
Conchita’s 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. 2 Instructions:
(a) Compute the amount of goodwill recognized, if any, on July 31, 2017.
(b) Determine the impairment loss, if any, to be recorded on December 31, 2017.
(c) Assume that fair value of the Conchita Division is $1,600,000 instead of $1,850,000. Determine
the impairment loss, if any, to be recorded on December 31, 2017.
(d) Prepare the journal entry to record the impairment loss, if any, and indicate where the loss
would be reported in the income statement. Exercise #4
On June 30, 2017, your client, Ferry Company, was granted two patents covering plastic cartons that it
had been producing and marketing profitably for the past 3 years. One patent covers the manufacturing
process, and the other covers the related products.
Ferry executives tell you that these patents represent the most significant breakthrough in the industry in
the past 30 years. The products have been marketed under the registered trademarks Evertight,
Duratainer, and Sealrite. Licenses under the patents have already been granted by your client to other
manufacturers in the United States and abroad, and are producing substantial royalties.
On July 1, Ferry commenced patent infringement actions against several companies whose names you
recognize as those of substantial and prominent competitors. Ferry’s management is optimistic that these
suits will result in a permanent injunction against the manufacture and sale of the infringing products as
well as collection of damages for loss of profits caused by the alleged infringement.
The financial vice president has suggested that the patents be recorded at the discounted value of
expected net royalty receipts.
(a) What is the meaning of “discounted value of expected net receipts”? Explain.
(b) How would such a value be calculated for net royalty receipts?
(c) What basis of valuation for Ferry’s patents would be generally accepted in accounting? Give
supporting reasons for this basis.
(d) Assuming no practical problems of implementation and ignoring generally accepted accounting
principles, what is the preferable basis of valuation for patents? Explain.
(e) What would be the preferable theoretical basis of amortization? Explain.
(f) What recognition, if any, should be made of the infringement litigation in the financial statements
for the year ending September 30, 2017? Discuss. 3