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Chapter 9: Q9-34PGA (page 534)

Accounting for intangibles

Midland States Telecom provides communication services in Iowa, Nebraska, the Dakotas, and Montana. Midland States Telecom purchased goodwill as part of the acquisition of Sheldon Wireless Enterprises, which had the following figures:

Book value of assets \( 900,000

Market value of assets 1,400,000

Market value of liabilities 530,000

Requirements

1. Journalize the entry to record Midland States Telecom’s purchase of Sheldon Wireless for \)440,000 cash plus a $660,000 note payable.

2. What special asset does Midland States Telecom’s acquisition of Sheldon Wireless identify? How should Midland States Telecom account for this asset after acquiring Sheldon Wireless? Explain in detail.

Short Answer

Expert verified

Answer

Goodwill is $230,000

Step by step solution

01

Meaning of Intangible Assets

The assets that increase the value of the business organization even without physical existence are known as intangible assets. Goodwill and patents are some of the intangible assets.

02

Record journal entries

Date

Accounts & Explanation

Debit ($)

Credit ($)

Assets

1,400,000

Goodwill (refer working note)

230,000

Liabilities

530,000

Cash

440,000

Notes Payable

660,000

(To record purchase of Sheldon wireless)

Working note: Calculation of Goodwill

Particulars

Amount ($)

Purchase Price to acquire Sheldon Wireless ($440,000+$660,000)

$1,100,000

Market value of Sheldon Wireless Assets $1,400,000

Less: Market value of Sheldon Wireless Liabilities (530,000)

870,000

Goodwill

$230,000

03

Special asset identified in acquisition 

Midland State Telecom will identify goodwill on the acquisition of Sheldon wireless. This goodwill arises because Midland has paid an amount of consideration that is more than the market value of the net assets of the Sheldon wireless.

Midland State Telecom will report goodwill of $230,000 on the balance sheet.

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Most popular questions from this chapter

Question: P9-36B Determining asset cost and recording partial-year depreciation

Safe Parking, near an airport, incurred the following costs to acquire land, make land improvements, and construct and furnish a small building:

a

Purchase price of three acres of land

$86,000

b

Delinquent real estate taxes on the land to be paid by safe parking

6,300

c

Additional dirt and earth removing

8,400

d

Title insurance and the land acquisition

3,400

e

Fence around the boundary of the property

9,600

f

Building permit for building

900

g

Architect’s fee for design of building

20,100

h

Signs near the front of property

9,000

i

Material used to construct the building

217,000

J

Labor to construct the building

172,000

k

Interest cost on construction loan for the building

9,500

l

Parking lots on the property

29,400

m

Lights for parking lots

11,600

n

Salary of construction supervisor(80% to building; 20% to parking lot and concrete walks)

80,000

o

Furniture

11,700

p

Transportation of furniture from seller to the building

1,900

q

Additional fencing

6,900

Safe Parking depreciates land improvements over 15 years, buildings over 40 years, and furniture over 10 years, all on a straight-line basis with zero residual value.

Requirements

1. Set up columns for Land, Land Improvements, Building, and Furniture. Show how to account for each cost by listing the cost under the correct account. Determine the total cost of each asset.

2. All construction was complete and the assets were placed in service on September 1. Record partial-year depreciation expense for the year ended December 31. Round to the nearest dollar.

How is gain or loss determined when disposing of plant assets? What situation constitutes a gain? What situation constitutes a loss?

Plant assets are recorded at historical cost. What does the historical cost of a plant asset include?

During 2018, Lora Company completed the following transactions:

Jan. 1 Traded in old office equipment with book value of \(55,000 (cost of \)129,000 and accumulated depreciation of \(74,000) for new equipment. Lora also paid \)55,000 in cash. Fair value of new equipment is \(116,000. Assume the exchange had commercial substance.

Apr. 1 Sold equipment that cost \)12,000 (accumulated depreciation of \(1,000 through December 31 of the preceding year). Lora received \)7,100 cash from the sale of the equipment. Depreciation is computed on a straightline basis. The equipment has a five-year useful life and a residual value of \(0.

Dec. 31 Recorded depreciation as follows:

Office equipment is depreciated using the double-declining-balance method over four years with a \)7,000 residual value.

Record the transactions in the journal of Lora Company.

During 2018, Lora Company completed the following transactions:

Jan. 1 Traded in old office equipment with book value of \(55,000 (cost of\)129,000 and accumulated depreciation of \(74,000) for new equipment.Lora also paid \)55,000 in cash. Fair value of new equipment is \(116,000.Assume the exchange had commercial substance.

Apr. 1 Sold equipment that cost \)12,000 (accumulated depreciation of \(1,000through December 31 of the preceding year). Lora received \)7,100 cashfrom the sale of the equipment. Depreciation is computed on a straightlinebasis. The equipment has a five-year useful life and a residual valueof \(0.

Dec. 31 Recorded depreciation as follows:

Office equipment is depreciated using the double-declining-balancemethod over four years with a \)7,000 residual value.

Record the transactions in the journal of Lora Company.
See all solutions

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