Exercises Intangible Assets

1. Consider each event concerning intangible assets independently:

a. Moonlit Corporation purchased a patent for €476,000 on January 1, 2017. The

company paid cash. The patent has a remaining legal life of 14 years. Due to
anticipated technological change, it is expected that the patent will be useless in 5
years.

b. In 2017, Beaumont Company spent €3,500,000 cash in research and development

costs. However, the research did not result in a patent. Beaumont Company
acquired a patent from another company for €1,000,000 on January 1, 2017. The
company paid cash. The acquired patent is expected to last 8 years.

Prepare all journal entries necessitated by events in a. and b. above during the year
2017

2. A buyer company has the following balance sheet (in the simple example, the book
values should correspond to the fair values):

Balance sheet Buyer company before company acquisition

Assets L&E
Bank account 1,000,000€ Equity 1,000,000€
Total Assets 1,000,000€ Total L & E 1,000,000€

The company to be acquired by the purchasing company has the following balance:
Assets L&E
PPE 200,000€ Equity 80,000€
Bank Loan 120,000€
Total Assets 200,000€ Total L & E 200,000€

The agreed purchase price for the acquisition of all assets and debts (asset deal) of the
target object is € 200,000.

Question:

a. How does the balance sheet from the buyer company looks like after the deal?

b. The goodwill will be amortized over 10 years. Three years after purchase, the value
of the goodwill is 70,000€. One year later the goodwill increased to back to
75,000€. Provide all journal entries necessary.
Solutions

1) a. Patent 476,000
Cash 476,000
Amortization Expense 95,200
Patent 95,200

b. Research and Development Expense 3,500,000

Cash 3,500,000
Patent 1,000,000
Cash 1,000,000
Amortization Expense 125,000
Patent 125,000

2. a. The balance sheet of the buyer company after the acquisition via asset deal is as follows:

Assets L&E
Goodwill 120,000€ Equity 1,000,000€
PPE 200,000€ Bank Loan 120,000€
Cash 800,000€
Total Assets 1,120,000€ Total L & E 1,120,000€

Explanation and calculation of goodwill:

The buyer company pays € 200,000; the bank balance is reduced by € 1,000,000 to € 800,000.

On the one hand, it receives property, plant and equipment in the amount of € 200,000 as well as debts in the
form of the bank loan in the amount of € 120,000.

So, the buyer company pays € 200,000 for the net assets of € 80,000 (€ 200,000 assets less € 120,000 debt).

The difference of € 120,000 is goodwill.

The purchase price also compensates for factors that are not included in the balance,
eg Customer base, brand name, image, non-activated patents etc.

The purchase price for companies is therefore usually (substantially) higher than the book assets.

b. Amortization each year:

Amortization Exp. 12,000

Goodwill 12,000

Impairment write off:

3 years of amortization = 36,000€

120,000 – 36,000 = 84,000€ - 70,000€ = 14,000€ impairment

Impairment losses 14,000

Goodwill 14,000

Recalculation of amortization:

70.000€ / 7 Years = 10.000€ amortization each year.

The increase to 75.000€ will be not considered since a reversal of an impairment of goodwill is not allowed.

Amortization of the 6. year

Amortization Exp. 10,000

Goodwill 10,000