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Chapter 12: Q12-9IFRS (page 657)

Use the information provided in IFRS12-8. Assume that the recoverable amount of the division is estimated to be \(750,000. Prepare Waters’ journal entry, if necessary, to record an impairment of the goodwill.

Waters Corporation purchased Johnson Company 3 years ago and at that time recorded goodwill of \)400,000. The Johnson Division’s net assets, including the goodwill, have a carrying amount of \(800,000. The recoverable amount of the division is estimated to be \)1,000,000. Prepare Waters’ journal entry, if necessary, to record impairment of the goodwill.

Short Answer

Expert verified

Loss on Impairment = $50,000

Step by step solution

01

Meaning of impairment of goodwill 

It is a reduction in earnings that corporations report on their income statement after discovering that an acquired asset linked with goodwill has not performed as planned financially at the time of purchase.

02

Preparing journal entries 

Date

Particulars

Debit ($)

Credit ($)

Loss on Impairment

50,000

Goodwill ($800,000 – $750,000)

50,000

An impairment has occurred because the reporting unit's recoverable amount ($750,000) is less than its carrying value ($800,000). The difference between the recoverable and carrying amounts is the loss amount.

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Most popular questions from this chapter

Question: Kenoly Corporation owns a patent that has a carrying amount of \(300,000. Kenoly expects future net cash flows from this patent to total \)210,000 over its remaining life of 10 years. The recoverable amount of the patent is $110,000. Prepare Kenoly’s journal entry, if necessary, to record the loss on impairment.

In 2016, Austin Powers Corporation developed a new product that will be marketed in 2017. In connection with the development of this product, the following costs were incurred in 2016: research and development costs \(400,000, materials and supplies consumed \)60,000, and compensation paid to research consultants $125,000. It is anticipated that these costs will be recovered in 2019. What is the amount of research and development costs that Austin Powers should record in 2016 as a charge to expense?

(Accounting for R&D Costs) In 2015, Wright Tool Company purchased a building site for its proposed research and development laboratory at a cost of \(60,000. Construction of the building was started in 2015. The building was completed on December 31, 2016, at a cost of \)320,000 and was placed in service on January 2, 2017. The estimated useful life of the building for depreciation purposes was 20 years. The straight-line method of depreciation was to be employed, and there was no estimated residual value.

Management estimates that about 50% of the projects of the research and development group will result in long-term benefits (i.e., at least 10 years) to the corporation. The remaining projects either benefit the current period or are abandoned before completion. A summary of the number of projects and the direct costs incurred in conjunction with the research and development activities for 2017 appears below.

Number of Projects

Salaries and Employee Benefits

Other Expenses (excluding Building Depreciation Charges)

Completed projects with long-term benefits

15

\( 90,000

\)50,000

Abandoned projects or projects that benefit the current period

10

65,000

15,000

Projects in process—results indeterminate

5

40,000

12,000

Total

30

\(195,000

\)77,000

Upon recommendation of the research and development group, Wright Tool Company acquired a patent for manufacturing rights at a cost of $88,000. The patent was acquired on April 1, 2016, and has an economic life of 10 years.

Instructions

If generally accepted accounting principles were followed, how would the items above relating to research and development activities be reported on the following financial statements?

(a) The company’s income statement for 2017.

(b) The company’s balance sheet as of December 31, 2017.

Be sure to give account titles and amounts, and briefly justify your presentation.

Question: Briefly discuss the convergence efforts that are underway in the area of intangible assets.

Raleigh Corp. has an investment with a carrying value (equity method) on its books of \(170,000 representing a 30% interest in Borg Company, which suffered a \)620,000 loss this year. How should Raleigh Corp. handle its proportionate share of Borg’s loss?
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