Problem 12-5 Shamrock Golf Inc. was formed on July 1, 2016, when Matt Magilke pu
ID: 2527767 • Letter: P
Question
Problem 12-5
Shamrock 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. Magilke plans to integrate the instructional business into his golf equipment and accessory stores. Magilke paid $830,000 cash for Old Master. At the time, Old Master’s balance sheet reported assets of $660,000 and liabilities of $220,000 (thus owners’ equity was $440,000). The fair value of Old Master’s assets is estimated to be $820,000. Included in the assets is the Old Master trade name with a fair value of $6,000 and a copyright on some instructional books with a fair value of $48,000. 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.
Prepare the intangible assets section of Shamrock Golf Inc. at December 31, 2016.
How much amortization expense is included in Shamrock income for the year ended December 31, 2016?
Prepare the journal entry to record amortization expense for 2017. Prepare the intangible assets section of Shamrock Golf Inc. at December 31, 2017. (No impairments are required to be recorded in 2017.) (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)
Intangibles Section of Balance Sheet
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 $480,000. The fair value of the Old Master reporting unit is $400,000. The implied value of goodwill is $150,000. Magilke has collected the following information related to the company’s intangible assets.
Intangible Asset
Expected Cash Flows
(undiscounted)
Fair Values
Prepare the journal entries required, if any, to record impairments on Shamrock intangible assets. (Assume that any amortization for 2018 has been recorded.) (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)
Accounts Payable
Accounts Receivable
Advertising Expense
Amortization Expense
Buildings
Cash
Computer Software Costs
Copyrights
Discount on Bonds Payable
Equipment
Franchises
Goodwill
Income Summary
Intangible Assets
Interest Expense
Inventory
Land
Legal Fees Expense
Loss on Impairment
Long-term Notes Payable
No Entry
Notes Payable
Organization Expense
Paid-in Capital in Excess of Par - Common Stock
Patents
Patent Expense
Prepaid Rent
Recovery of Loss from Impairment
Rent Expense
Rent Receivable
Rent Revenue
Research and Development Expense
Retained Earnings
Trade Names
Trademarks
Problem 12-5
Shamrock 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. Magilke plans to integrate the instructional business into his golf equipment and accessory stores. Magilke paid $830,000 cash for Old Master. At the time, Old Master’s balance sheet reported assets of $660,000 and liabilities of $220,000 (thus owners’ equity was $440,000). The fair value of Old Master’s assets is estimated to be $820,000. Included in the assets is the Old Master trade name with a fair value of $6,000 and a copyright on some instructional books with a fair value of $48,000. 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.
Explanation / Answer
(a).
Intangible Section of Balance Sheet
(December 31, 2016)
Trade name
$6000
Copyright (Net accumulated amortization of $ 600)
$47400
Goodwill
$230000
Total intangibles
$283400
Amortization expense for 2016 = $600
Working Note;
1. Cost of copyright on December 31, 2016 will be calculated as follow;
Cost of Copyright at date of purchase
$48000
Amortization of copyright in 2016 ($48000 / 40) * ½
($600)
Cost of copyright at December 31, 2016
$47400
2. Goodwill will be measured as follow;
Purchase price
$830000
Fair value of assets
$820000
Fair value of liabilities
($220000)
Fair value of net assets ($820000 - $220000)
$600000
Value of goodwill ($830000 – $600000)
$230000
3. The amortization expense amount for 2016 is $600. There is no amortization for the goodwill or the trade name.
(b).
Date
Accounts Title & Explanation
Debit
Credit
2017
Dec. 31
Amortization Expense
$1200
Copyrights ($48000 / 40)
$1200
(For recording amortization expense)
Intangible Section of Balance Sheet
(December 31, 2017)
Trade name
$6000
Copyright (Net accumulated amortization of $ 1800)
$46200
Goodwill
$230000
Total intangibles
$282200
(c).
Date
Accounts Title & Explanation
Debit
Credit
2018
Dec. 31
Loss on Impairment
$80700
Goodwill ($230000 – $150000)
$80000
Trade Names ($6000 - $5300)
$700
(For recording loss on impairment)
Working Note;
1. Goodwill and tradenames will be impaired because fair value of these two is less than carrying value.
Intangible Section of Balance Sheet
(December 31, 2016)
Trade name
$6000
Copyright (Net accumulated amortization of $ 600)
$47400
Goodwill
$230000
Total intangibles
$283400