Amortization and impairment of intangible assets

On December 31, 2014, Probe Corporation acquired the following three intangible assets:

 A trademark for P300,000. The trademark has 7 years remaining legal life. It is
anticipated that the trademark will be renewed in the future, indefinitely, without
problem.

 Goodwill for P1,500,000. The goodwill is associated with Probe’s Nexus Manufacturing
reporting unit.

 A customer list for P220,000. By contract, Probe has exclusive use of the list for 5 years.
Because of market conditions, it is expected that the list will have economic value for just
3 years.

On December 31, 2015, before any adjusting entries for the year were made, the following
information was assembled about each of the intangible assets:

a.) Because of a decline in the economy, the trademark is now expected to generate cash
flows of just P10,000 per year. The useful life of trademark still extends beyond the
foreseeable horizon.

b.) The cash flows expected to be generated by the Nexus Manufacturing reporting unit is
P250,000 per year for the next 22 years. Book values and fair values of the assets and
liabilities of the Nexus Manufacturing reporting unitare as follows:

Book values Fair values

Identifiable assets P2,700,00 P3,000,000
Goodwill 1,500,000 ?
Liabilities 1,800,000 1,800,000

c.) The cash flows expected to be generated by the customer list are P120,000 in 2016 and P
80,000 in 2017.

REQUIRED:

Based on the above and the result of your audit, determine the following: (Assume that the
appropriate discount rate for all items is 6%):

1. Total amortixation for the year 2015

2. Impairment loss for the year 2015

3. Carrying amount of Trademark as of December 31, 2015

 4. Carrying amount of Goodwill as of December 31, 2015

5. Carrying amount of Customer list as of December 31, 2015

SOLUTION:

Requirement No. 1
Trademark* -
Goodwill* -
73,3
Customer list (P220,000/3) 33
73,3
Total amortization 33
*The useful life is indefinite, so no amortization expense is
recognized.

Requirement No. 2
Impairment
loss
Trademark:
300,0
Carrying amount 00
166,6 133,3
Recoverable amount (P10,000/0.06) 67 33

Goodwill*:
Carrying amount of Manufacturing
unit
2,400,0
(P2,700,000 + P1,500,000 - P1,800,000) 00
Recoverable amount (P250,000 x 3,010,4
12.0416) 00 -

Customer list
Carrying amount (P220,000 - 146,6
P73,333) 67
Recoverable amount:
113,2
2013: (P120,000 x 0.9434) 08
71,2 184,4
2014: (P80,000 x 0.8900) 00 08 -
 133,3
Total impairment loss 33

*Since goodwill does not generate cash flows independently from other assets
or group
of assets, the recoverable amount of goodwill as an individual asset cannot be
determined. Therefore, the recoverable amount is determined for the cash
generating unit to which goodwill
belongs.

Requirement No. 3
300,0
Cost 00
133,3
Less impairment loss 33
Carrying amount of Trademark, 166,6
12/31/12 67

Requirement No. 4
Since goodwill is not amortized and is not impaired as of
12/31/12,
the carrying amount is P1,500,000.

Requirement No. 5
220,0
Cost 00
73,3
Less amortization for 2012 33
Carrying amount of Customer List, 146,6
12/31/12 67