On January 2, 2017, Raconteur Corp. reported the following intangible assets: (1) copyright with a carrying value of \(15,000, and (2) a trade name with a carrying value of \)8,500. 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 10 years.

At December 31, 2017, Raconteur assessed the intangible assets for possible impairment and developed the following information.

	Estimated Undiscounted Expected Future Cash Flows	Estimated Fair Value
Copyright	\(20,000	\)16,000
Trade name	10,000	5,000

Accounting

Prepare any journal entries required for Raconteur’s intangible assets at December 31, 2017.

Analysis

Many stock analysts indicate a preference for less-volatile operating income measures. Such measures make it easier to predict future income and cash flows, using reported income measures. How does the accounting for impairments of intangible assets affect the volatility of operating income?

Principles

Many accounting issues involve a trade-off between the primary characteristics of relevant and representationally faithful information. How does the accounting for intangible asset impairments reflect this trade-off?

Amortization of Intangible Assets alludes to the strategy under which the cost of the distinctive intangible assetsof the company (assets that don't have any physical existence, cannot be felt and touched like trademark, goodwill, patents, etc.) are expensed over the particular period of time.

The copyright has a full year of amortization. The trade name, which is considered an intangible with endless life, has no amortization.

Calculating amortization expense:

$$\begin{gathered} \mathbf{\text{Amortization}}\mathbf{}\mathbf{\text{expense}}\mathbf{=}\frac{\mathbf{\text{Copyright}}\mathbf{}\mathbf{\text{value}}}{\mathbf{\text{Remaining}}\mathbf{}\mathbf{\text{life}}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\frac{\mathbf{\$}\mathbf{15}\mathbf{,}\mathbf{000}}{\mathbf{10}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{500} \end{gathered}$$

The recoverability test for the copyright demonstrates that the copyright isn't impeded: The anticipated cash flows (undiscounted) of $20,000 are more prominent than the carrying value of $13,500 ($15,000 – $1,500).

A fair value test is used to determine if the trade name is impaired. Raconteur reduces it to $5,000 in fair value, resulting in an impairment penalty of $8,500 – $5,000 = $3,500.

Operating income is used to account for impairment losses. Because impairments are one-time events, their recognition might cause operating income to fluctuate year to year. Intangibles with an infinite life span, such as a trade name or goodwill, are particularly vulnerable to this volatility impact.

As there is no amortization, the larger carrying values, together with the yearly fair-value impairment test, can result in considerable impairment losses that have a major impact on operating income.

Accounting for intangible asset impairments gives useful information about intangible assets by revealing when their value has decreased. However, in order to provide this timely information, considerable subjective judgments are required when predicting

1. predicted cash flows for the cash flow recovery test and
2. Fair values for assessing the amount of impairment to be recorded.

These estimations may raise questions regarding the accuracy with which impairment losses are represented.