Question: (Accounting for Goodwill) On July 1, 2017, Brigham Corporation purchased Young Company by paying \(250,000 cash and issuing a \)100,000 note payable to Steve Young. At July 1, 2017, the balance sheet of Young Company was as follows.

Cash	\( 50,000	Accounts payable	\)200,000
Accounts receivable	90,000	Stockholders’ equity	235,000
Inventory	100,000		\(435,000
Land	40,000
Buildings (net)	75,000
Equipment (net)	70,000
Trademarks	10,000
	\)435,000

The recorded amounts all approximate current values except for land (fair value of \(60,000), inventory (fair value of \)125,000), and trademarks (fair value of \(15,000).

Instructions

Prepare the July 1 entry for Brigham Corporation to record the purchase.

Prepare the December 31 entry for Brigham Corporation to record amortization of intangibles. The trademark has an estimated useful life of 4 years with a residual value of \)3,000.

Step by step solution

01

Step 1: Meaning of Patents

Patents are the company's most valuable and intangible assets, granting specific legal rights to use a process or develop and sell a product. The value of patents rises or falls in accordance with the business's performance.

02

Preparing journal entry (a)

Date	Particular	Debit ($)	Credit ($)
	Cash	50,000
	Receivables	90,000
	Inventory	125,000
	Land	60,000
	Buildings	75,000
	Equipment	70,000
	Trademark	15,000
	Goodwill	65,000
	Accounts Payable		200,000
	Notes Payable		100,000
	Cash		250,000

Working notes:

Calculating the amount of Goodwill

$$\begin{gathered} \text{Goodwill}=\text{Cash}\text{paid}+\text{Note}\text{payable}-\left(\text{Stockholders'}\text{equiy}+\text{Cash}\text{amount}\right) \\ =\$250,000+\$100,000-(\$235,000+\$50,000) \\ =\$350,000-\$285,000 \\ =\$65,000 \end{gathered}$$

Note that the facility and equipment would be valued at Brigham's cost on 7/1/2017, with no accrued depreciation charges.

03

Preparing journal entry (b)

Date	Particular	Debit ($)	Credit ($)
	Amortization Expense	1,500
	Trademarks		1,500

Working notes:

Calculating the amount of Trademark

$$\begin{gathered} \text{Trademark}=\left(\text{Initial}\text{trademark}-\text{Residual}\text{value}\right)\times \text{Estimated}\text{useful}\text{life}\times \text{Total}\text{month} \\ =\left(\$15,000-\$3,000\right)\times \frac{1}{4}\times \frac{6}{12} \\ =\$12,000\times \frac{1}{4}\times \frac{6}{12} \\ =\$1,500 \end{gathered}$$

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