Acquisition and Valuation of Intangibles
Beecher’s Boston Barbeque Company purchased a customer list and an ongoing research project for a total of $300,000. Beecher uses the expected cash flow approach for estimating the fair value of these two intangibles. The appropriate interest rate is 8%. The potential future cash flows from the two intangibles, and their associated probabilities, are as follows:
Customer List
|
Outcome 1 |
20% probability of cash flows of $40,000 at the end of each year for five |
|
|
years. |
|
Outcome 2 |
30% probability of cash flows of $18,000 at the end of each year for four |
|
|
years. |
|
Outcome 3 |
50% probability of cash flows of $9,000 at the end of each year for three |
|
|
years. |
|
Ongoing Research Project |
|
|
Outcome 1 |
10% probability of cash flows of $450,000 at the end of each year for |
|
10 years. |
|
|
Outcome 2 |
20% probability of cash flows of $12,000 at the end of each year for four |
|
|
years. |
|
Outcome 3 |
70% probability of cash flows of $500 at the end of each year for three |
|
|
years. |
Instructions: Prepare the journal entry necessary to record the purchase of the two intangibles.