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Chapter 12: Q28. (page 610)
What is meant by the term “underlying” as it relates to derivative financial instruments.
Underlying is a special rate that helps determine the price of the derivative.
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Use the information provided in BE12-1. Assume that at January 1, 2019, the carrying amount of the patent on Taylor Swift’s books is \(43,200. In January, Taylor Swift spends \)24,000 successfully defending a patent suit. Taylor Swift still feels the patent will be useful until the end of 2026. Prepare the journal entries to record the $24,000 expenditure and 2019 amortization.
King Company is contemplating the purchase of a smaller company, which is a distributor of King’s products. Top management of King is convinced that the acquisition will result in significant synergies in its selling and distribution functions. The financial management group (of which you are a part) has been asked to analyze the effects of the acquisition on the combined company’s financial statements. This is the first acquisition for King, and some of the senior staff insist that based on their recollection of goodwill accounting, any goodwill recorded on the acquisition will result in a “drag” on future earnings for goodwill amortization. Other younger members on the staff argue that goodwill accounting has changed. Your supervisor asks you to research this issue.
Instructions
Access the IFRS authoritative literature at the IASB website (http://eifrs.iasb.org/). (Click on the IFRS tab and then register for free eIFRS access if necessary.) When you have accessed the documents, you can use the search tool in your Internet browser to respond to the following questions. (Provide paragraph citations.)
(Comprehensive Intangible Assets) Montana Matt’s 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. Magik plans to integrate the instructional business into his golf equipment and accessory stores. Magik paid \(770,000 cash for Old Master. At the time, Old Master’s balance sheet reported assets of \)650,000 and liabilities of \(200,000 (thus owners’ equity was \)450,000). The fair value of Old Master’s assets is estimated to be \(800,000. Included in the assets is the Old Master trade name with a fair value of \)10,000 and copyright on some instructional books with a fair value of \(24,000. 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.
Instructions
Intangible Asset | Expected Cash Flows (undiscounted) | Fair value |
Trade names | \( 9,000 | \) 3,000 |
Copyrights | 30,000 | 25,000 |
Prepare the journal entries required, if any, to record impairments on Montana Matt’s intangible assets. (Assume that any amortization for 2018 has been recorded.) Show supporting computations.
Garfield Company purchased, on January 1, 2017, as a held-to-maturity investment, \(80,000 of the 9%, 5-year bonds of Chester Corporation for \)74,086, which provides an 11% return. Prepare Garfield’s journal entries for (a) the purchase of the investment, and (b) the receipt of annual interest and discount amortization. Assume effective-interest amortization is used.
On January 1, 2017, Hi and Lois Company purchased 12% bonds having a maturity value of \(300,000 for \)322,744.44. The bonds provide the bondholders with a 10% yield. They are dated January 1, 2017, and mature January 1, 2022, with interest received on January 1 of each year. Hi and Lois Company uses the effective interest method to allocate unamortized discount or premium. The bonds are classified in the held-to-maturity category.
Instructions
(a) Prepare the journal entry at the date of the bond purchase.
(b) Prepare a bond amortization schedule.
(c) Prepare the journal entry to record the interest revenue and the amortization at December 31, 2017.
(d) Prepare the journal entry to record the interestand the amortization at December 31, 2018.
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