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Splish Brothers Golf Inc
Splish Brothers 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 $780,000 cash for Old Master. At the time, Old Master's balance sheet reported assets of $670,000 and liabilities of $190,000 (thus owners' equity was $480,000). The fair value of Old Master's assets is estimated to be $810,000. Included in the assets is the Old Master trade name with a fair value of $10,000 and a copyright on some instructional books with a fair value of $43,200. 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.
(a)
Prepare the intangible assets section of Splish Brothers Golf Inc. at December 31, 2019.
SPLISH BROTHERS GOLF INC.
Intangibles Section of Balance Sheet
December 31, 2019
Trade Names
$10,000
Copyrights
42,660
Goodwill
160,000
Total Intangible Assets
$212,660
How much amortization expense is included in Splish Brothers income for the year ended December 31, 2019?
Amortization expense $540
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(b)
Prepare the journal entry to record amortization expense for 2020. Prepare the intangible assets section of Splish Brothers Golf Inc. at December 31, 2020. (No impairments are required to be recorded in 2020.) (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 Debit Credit
Amortization Expense 1,080
Copyrights 1,080
SPLISH BROTHERS GOLF INC.
Intangibles Section of Balance Sheet
December 31, 2020
Trade Names
$10,000
Copyrights
41,580
Goodwill
160,000
Total Intangible Assets
$211,580
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(c)
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 $480,000. The fair value of the Old Master reporting unit is $400,000. Magilke has collected the following information related to the company's intangible assets.
Intangible Asset Expected Cash Flows(undiscounted) Fair Values
Trade names $14,700 $4,900
Copyrights 49,000 44,000
Prepare the journal entries required, if any, to record impairments on Splish Brothers 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 Debit Credit
enter an account title enter a debit amount enter a credit amount
enter an account title enter a debit amount enter a credit amount
enter an account title enter a debit amount enter a credit amount
Expert Solution
Calculation of Goodwill:
Fair value of Net Assets = Fair value of Assets - Fair value of Liabilities
= $810,000 - $160,000
= $650,000
Value assigned to Goodwill = Purchase Price - Fair value of Net Assets
= $780,000 - $670,000
= $110,000
Net identifiable assets excluding goodwill = Book Value - Value assigned to goodwill
= $480,000 - $110,000
= $370,000
Implied value of goodwill = Fair value of the Old Master reporting unit - Net identifiable assets excluding goodwill
= $400,000 - $370,000
= $30,000
Goodwill = Value assigned to goodwill - Implied value of goodwill
= $110,000 - $30,000
= $80,000
Trade names = Fair value of Trade Name (Initial) - Fair value of Trade Name (2021)
= $10,000 - $4,900
= $5,100
Expected future cash flows = $49,000
Carrying Value = $43,200
Here, expected net future cash flows greater than Carrying Value, so no impairment for copyright.
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