Only recorded when purchased, not when generated internally

Transcription

1 Goodwill Only recorded when purchased, not when generated internally If net assets purchased, Goodwill = Purchase Price ΣFMV (net assets), recorded with the other assets & the liabilities on the acquirer s books. If stock > 20% but < 50% purchased, Goodwill is buried in the investment in affiliate account If stock > 50% purchased, Goodwill is reported on the consolidated balance sheet

2 E12-13 (Accounting for Goodwill) On 7/1/2014, B Corp. purchased Y Company by paying $250,000 cash and issuing a $100,000 note payable. At 7/1/2014, the balance sheet of Y Company was: Cash $ 50,000 Accounts payable $200,000 Receivables 90,000 Stockholders equity 235,000 Inventory 100,000 $435,000 Land 40,000 Buildings (net) 75,000 Equipment (net) 70,000 Trademarks 10,000 $435,000 BV = MV except land (FMV=$60,000), inventory (FMV=$125,000), trademarks (FMV=$15,000). (a) Prepare the July 1 entry for B Corp. to record the purchase. (b) Prepare the 12/31 entry for amortization of intangibles. The trademark has an estimated useful life of 4 years with a residual value of $3,000.

3 Goodwill Impairment Goodwill only has value as part of net assets Cashflows projected from net assets imply a value for the going concern Goodwill must be written off completely before net assets are written down, so impairment loss is only on GW As of 12/15/2011: Goodwill impairment follows assessment of qualitative factors rather than required annual impairment testing => Goodwill impairment needs a triggering event just like PPE impairments Example: Ex 12-15

4 E12-15 (Goodwill Impairment) Net assets of the C Division of Santana, Inc. C Division Net Assets at 12/3/14 (in millions) Cash $ 50 Receivable 200 Property, plant, and equipment (net) 2,600 Goodwill 200 Less: Notes Payable (2,700) Net assets $350 C Division develops nuclear-powered aircraft. If successful, traveling delays associated with refueling could be substantially reduced. To date, management has not had much success and is deciding whether to impair (what is the triggering event?). Estimated future net cash flows $400 million. Management has also received an offer to purchase the division for $335 million. All identifiable assets and liabilities NBV=FMV. (a) Journal entry (if any) to record the impairment at 12/31/14. (b) At 12/31/15 the division s FMV is $345 million. JE (if any) to record this increase in fair value.

5 Research & Development Costs US GAAP vs. IFRS Research Development Technological Feasibility IPR&D

6 1) R & D Activities a) Laboratory research aimed at discovery of new knowledge. b) Searching for applications of new research findings. c) Conceptual formulation and design of possible product of process alternatives. d) Testing in search for or evaluation of product or process alternatives. e) Modification of the design of a product or process. f) Design, construction, and testing of preproduction prototypes and models. g) Design of tools, jugs, molds, and dies involving new technology. h) Design, construction, and operation of a pilot plant not useful for commercial production. i) Engineering activity required to advance the design of a product to the manufacturing stage. 2) Activities Not Considered R & D a) Engineering follow-through in an early phase of commercial production. b) Quality control during commercial production including routine testing. c) Trouble-shooting breakdowns during production. d) Routine, n-going efforts to refine, enrich, or improve the qualities of an existing product. e) Adoption of an existing capability to a particular requirement or customer s need. f) Periodic design changes to existing products. g) Routine design of tools, jigs, molds, and dies. h) Activity, including design and construction engineering related to the construction, relocation, re-arrangement, or start-up of facilities or equipment. i) Legal work on patent applications, sale, licensing, or litigation.

7 E12-16 (Accounting for R & D) In 2013 Co. spends $325,000 on a research project, but by 12/31/2013 it is unclear whether any benefit will be derived from it. (a) What account should be charged for the $325,000, and how should it be shown in the financial statements? (b) The project is completed and patented in The R&D to complete is $110,000. The administrative and legal expenses in 2014 total $16,000. Expected useful life of 5 years. JEs (including full year amortization) in 2014? (c) In 2015, the company defends the patent with legal costs of $47,200, extending the patent life to 12/31/22. JEs (including amortization) in 2015? (d) Additional engineering and consulting costs incurred in 2015 required to advance the design of a product to the manufacturing stage total $60,000. Proper accounting treatment?