Question

Wember Company acquired a subsidiary company on December 31, 2012, and recorded the cost of the intangible assets it acquired as follows:

Patent	$100,000
Trade name	80,000
Goodwill	150,000

The patent is being amortized by the straight-line method over an expected life of 10 years with no residual value. Amortization has been recorded for the current year. The trade name was considered to have an indefinite life.

Because of the success of the subsidiary in the past, Wember has not previously considered any of the intangible assets to be impaired. However, in 2016, because of a current recession and technological changes in the subsidiary’s industry, Wember decides to review all of its intangible assets for impairment and record any adjustments at December 31, 2016.

Wember estimates that the fair value of the patent is $42,000. The company estimates the fair value of the trade name to be $90,000 but decides that it now has a limited life of 5 years. The subsidiary company, which qualifies as a reporting unit, has a book value of $700,000, including the goodwill of $150,000. Wember estimates that the fair value of the subsidiary company is $400,000, of which it allocates 80% to the identifiable assets and liabilities.

Required:

1.	Prepare journal entries for Wember to record the impairment of its intangible assets at December 31, 2016.
2.	Prepare journal entries for Wember to record the amortization expense for its intangibles at December 31, 2017.

CHART OF ACCOUNTS Wember Company General Ledger ASSETS 111 Cash 121 Accounts Receivable 141 Inventory 152 Prepaid Insurance 171 Equipment 179 Accumulated Depreciation 181 Patent 184 Goodwill 187 Trade Name LIABILITIES 211 Accounts Payable 231 Salaries Payable 250 Unearned Revenue 261 Income Taxes Payable EQUITY 311 Common Stock 331 Retained Earnings REVENUE 411 Sales Revenue EXPENSES 500 Cost of Goods Sold 511 Insurance Expense 512 Utilities Expense 521 Salaries Expense 532 Bad Debt Expense 533 Amortization Expense 540 Interest Expense 541 Depreciation Expense 559 Miscellaneous Expenses 891 Loss on Impairment 910 Income Tax Expense

Answer 1

1	Particulars	Workings	Amount
	Book value of the patent	(100000-(100000*4/10)	60000
	Trade name		80000
	Goodwill		150000
	Estimated fair value of patent		42000
a	Journal entry to record the loss due to impairment for the patent
		Amount	Amount
	Loss on impairment (patent)(60000-42000)	18000
	Patent		18000
	( To record the impairment loss on patents)
b	For trade name there is no impairment loss because fair value of the trade name is greater than the book value of the trade name, hence there is no impairment loss on trade name
c	Calculate impairment loss on goodwill
	book value of asset of parent	700000
	Goodwill	150000
	other assets	550000
	fair value of the subsidiary	$400,000
	identifiable assets (400000*.8)	$320,000.0
	Goodwill (400000-320000)	$80,000.0
	Impairment loss on goodwill
	(150000-80000)	$70,000.0
	Journal entry to record the loss due to impairment for the Goodwill
	loss on impairment ( Goodwill)	70000
	Goodwill		70000
	( To record the loss on impairment on goodwill
2)	Journal entry for amortization Expenses for intangibles
	Amortization Expenses ( patent)(42000/6)	7000
	Patent		7000
	( To record the amortization expense on patent)
	Amortization expense ( trade name)(80000/5)	16000
	trade name		16000
	( to record the amortization expense on trade name)