Negative goodwill arises when the of the net assets acquired is higher than the

Negative goodwill arises when the of the net assets

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5.Negative goodwill arises when the ______________ of the net assets acquired is higher thanthe purchase price of the assets.a.useful lifeb.carrying valuec.fair valued.excess earningsSolution 12-1271.d2.d3.d4.b5.cEx. 12-128Intangible assets have either a limited useful life or an indefinite useful life. How should these two different types of intangibles be amortized?Solution 12-128Limited-life intangible assets should be amortized by systematic charges to expense over the shorter of their useful life or legal life. An intangible asset with an indefinite life is not amortized.12 - 35
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Ex. 12-129What are factors to be considered in estimating the useful life of an intangible asset? Solution 12-129Factors to be considered in determining useful life are:a.The expected use of the asset by the entity.b.The expected useful life of another asset or a group of assets to which the useful life of the intangible asset may relate.c.Any legal, regulatory, or contractual provisions that may limit useful life.d.Any legal, regulatory or contractual provisions that enable renewal or extension of the asset’s legal or contractual life without substantial cost.e.The effects of obsolescence, demand, competition, and other economic factors.f.The level of maintenance expenditure required to obtain the expected future cash flows from the asset.Ex. 12-130Barkley Corp. obtained a trade name in January 2011, incurring legal costs of $30,000. The company amortizes the trade name over 8 years. Barkley successfully defended its trade name in January 2012, incurring $9,800 in legal fees. At the beginning of 2013, based on newmarketing research, Barkley determines that the fair value of the trade name is $24,000. Estimated total future cash flows from the trade name are $26,000 on January 4, 2013.InstructionsPrepare the necessary journal entries for the years ending December 31, 2011, 2012, and 2013. Show all computations.12 - 36
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Solution 12-1302011Dec. 31Amortization Expense3,750Trade Names3,750($30,000 ÷ 8 years)2012Dec. 31Amortization Expense6,900Trade Names6,900[($30,000 - $3,750 + $9,800) ÷7 years]2013Dec. 31Loss on Impairment3,450Trade Names3,450Carrying value = $30,000 - $3,750 + $9,800 - $5,150 = $30,900Total future cash flows = 26,000Therefore, an impairment loss has occurredCarrying value = $30,900Fair value = (24,000)Loss on impairment= $ 6,9002013Dec. 31Amortization Expense4,000Trade Names4,000($24,000 ÷ 6 years)Ex. 12-131—Intangible assets theory.It has been argued on the grounds of conservatism that all intangible assets should be written offimmediately after acquisition. Discuss the accounting arguments against this treatment.Solution 12-131Intangible assets provide revenues over a period of years. Limited-life intangibles are thereforecapitalized and amortized by systematic charges to expense over their useful life. This treatmentis in accordance with the expense recognition principle—deducting expenses in the sameperiod(s) that revenues are reported.
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