Question

Skysong Golf Inc. was formed on July 1, 2019, when Matt Magilke purchased the Old Master Golf Company. Old Master provides video golf instruction at kiosks in shopping malls. Magilke plans to integrate the instructional business into his golf equipment and accessory stores. Magilke paid $810,000 cash for Old Master. At the time, Old Master’s balance sheet reported assets of $650,000 and liabilities of $220,000 (thus owners’ equity was $430,000). The fair value of Old Master’s assets is estimated to be $840,000. Included in the assets is the Old Master trade name with a fair value of $6,000 and a copyright on some instructional books with a fair value of $52,800. 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.

At the end of 2021, Magilke is evaluating the results of the instructional business. Due to fierce competition from online and television (e.g., the Golf Channel), the Old Master reporting unit has been losing money. Its book value is now $460,000. The fair value of the Old Master reporting unit is $380,000. Magilke has collected the following information related to the company’s intangible assets.

Intangible Asset		Expected Cash Flows (undiscounted)		Fair Values
Trade names		$18,000		$6,000
Copyrights		60,000		55,000

Prepare the journal entries required, if any, to record impairments on Skysong intangible assets. (Assume that any amortization for 2021 has been recorded.) (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Account Titles and Explanation

Answer 1

Particulars	Debit	Credit
Loss on impairment	80,000
Goodwill		80,000
Trade names		0
(Being to record impairments on Skysong intangible assets)

Calculation

Calculation of Goodwill:

Fair value of Net Assets =  Fair value of Assets - Fair value of Liabilities

= 840,000 - 2,20,000 = 620,000

Value assigned to goodwill =  Purchase Price - Fair value of Net Assets

= 810,000 - 620,000 = 190,000

Impairment :

Net identifiable assets excluding goodwill = Book Value - Value assigned to goodwill

= 460,000 - 190,000 = 270,000

Implied value of goodwill = Fair value of the Old Master reporting unit - Net identifiable assets excluding goodwill =

   = 380,000 - 270,000 = 110,000

Goodwill = Value assigned to goodwill - Implied value of goodwill

   = 190,000 - 110,000 = 80,000

Trade names = Fair value of Trade Name (Initial)  - Fair value of Trade Name (2021)

   = 6,000 - 6,000 = 0

Copyright =

Expected future cash flows = 60,000

Carrying Value =  52,800

Here, expected net future cash flows greater than Carrying Value, so no impairment for copyright.