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Chapter 12: Question 1 (page 637)

What are the two main characteristics of intangible assets?

Short Answer

Expert verified

It is not physical, meaning it exists as a legal authority and is distinguishable from other assets.

Step by step solution

01

Definition of intangible assets

An identified non-monetary item with no physical substance is known as an intangible asset. It is identifiable when an asset is separable or comes from contractual or other legal rights.

02

Characteristics

An intangible asset has two key characteristics: it is not physical, meaning it exists as a legal authority and is distinguishable from other assets.

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Most popular questions from this chapter

Stephan Curry, Inc., spent \(68,000 in attorney fees while developing the trade name of its new product, the Mean Bean Machine. Prepare the journal entries to record the \)68,000 expenditure and the first year’s amortization, using an 8-year life.

: As a new intern for the local branch office of a national brokerage firm, you are excited to get an assignment that allows you to use your accounting expertise. Your supervisor provides you with the spreadsheet below, which contains data for the most recent quarter for three companies that the firm has been recommending to its clients as “buys.” Each of the companies’ returns on assets has outperformed their industry cohorts in the past. But, given recent challenges in their markets, there is concern that the companies may experience operating challenges and lower earnings. (All numbers in millions, except return on assets.)

A

B

C

D

E

Company

Fair Value of Company

Book Value (Net Assets)

Carrying Value of Goodwill

Return on Assets

Sprint Nextel

\(36,361

\)51,271

$30,718

3.5%

Washington Mutual

11,742

23,941

9,062

2.4

E* Trade Financial

1,639

4,104

2,035

5.6

Instructions

  1. The fair value for each of these companies is lower than the corresponding book value. What implications does this have for each company’s future prospects?
  2. To date, none of these companies has recorded goodwill impairments. Your supervisor suspects that they will need to record impairments in the near future, but he is unsure about the goodwill impairment rules. Is it likely that these companies will recognize impairments? Explain.
  3. Estimate the amount of goodwill impairment for each company and prepare the journal entry to record the impairment. For each company, you may assume that the book value less the carrying value of the goodwill approximates the fair value of the company’s net assets.
  4. Discuss the effects of your entries in part (c) on your evaluation of these companies based on the return on assets ratio.

Question: Explain how the investment account is affected by investee activities under the equity method.

Question: On September 1, 2017, Winans Corporation acquired Aumont Enterprises for a cash payment of \(700,000. At the time of purchase, Aumont’s balance sheet showed assets of \)620,000, liabilities of \(200,000, and owners’ equity of \)420,000. The fair value of Aumont’s assets is estimated to be $800,000. Compute the amount of goodwill acquired by Winans.

Why might a company become involved in an interest rate swap contract to receive fixed interest payments and pay variable?
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