Question

She Shed. Corp was organized in 2017. These business events occurred during the year, affecting intangible assets. 1. Purchased a license for $20,000 on July 1, 2017. The license gives She Shed exclusive rights to sell its sheds in the tri-state region and will expire on July 1, 2025. 2. Purchased a patent on January 2, 2018, for $40,000. It is estimated to have a 5-year life. 3. Costs incurred to develop an exclusive Internet connection process as of June 1, 2018, were $45,000. The process has an indefinite life. 4. On April 1, 2018, She Shed. purchased a small circuit board manufacturer for $350,000. Goodwill recorded in the transaction was $90,000. 5. On July 1, 2018, legal fees for successful defense of the patent purchased on January 2, 2018, were $11,400. 6. Research and development costs incurred as of September 1, 2018, were $75,000. (a) Prepare the journal entries to record all the entries related to the patent during 2018. (b) At December 31, 2018, an impairment test is performed on the license purchased in 2017. It is estimated that the net cash flows to be received from the license will be $13,000, and its fair value is $7,000. Compute the amount of impairment, if any, to be recorded on December 31, 2018. (c) What is the amount to be reported for intangible assets on the balance sheet at December 31, 2017?

Answer 1

A) To record all the entries related to the patent during 2018
Date	Accounts title and explaination	Debit	Credit
02-01-18	Patents	$   40,000.00
	TO cash		40000
	(To record the purchase of patent)
01-07-18	Patents	$   11,400.00
	TO cash		11400
	(To record the purchase of patent)
31-12-18	Patent amortization expense	$     9,267.00
	To patents		9267
	(to record the amorization expense)
Computation of amortization expense:
	40000*12/60	$     8,000.00
	11400*6/54	$     1,266.67
	Amortization expense	$   9,266.67
B) Computation of impairment loss :
	Particulars	Amount
	Cost	$   20,000.00
	Less : accumulated depreciation	$    (3,750.00)
	(20000*18/96)
	Book value	$ 16,250.00
Book value of $16250 is greater than net cash flows of $13000.
Therefore the license is impaired
The impair loss is computed as follows :
	Book value	$   16,250.00
	Fair value	$     7,000.00
	Impairment loss	$   9,250.00
C)amount to be reported for intangible assets on the balance sheet at December 31, 2017?
	Particulars	Amount
	License	$     7,000.00
	Patents (40000+11400-9267)	$   42,133.00
	Goodwill	$   90,000.00