Intangible Impairment
On December 31, 2007, Magily Company acquired the following three intangible assets:
(a) A trademark for $30,000. The trademark has seven years remaining in its legal life. It is anticipated that the trademark will be renewed in the future, indefinitely, without problem.
(b) Goodwill for $150,000.The goodwill is associated with Magily’s Abacus Manufacturing reporting unit.
(c) A customer list for $22,000. By contract, Magily has exclusive use of the list for five years. Because of market conditions, it is expected that the list will have economic value for just three years. On December 31, 2008, 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 $1,000 per year. The useful life of the trademark still extends beyond the foreseeable horizon.
(b) The cash flow expected to be generated by the Abacus Manufacturing reporting unit is $25,000 per year for the next 22 years. Book values and fair values of the assets and liabilities of the Abacus Manufacturing reporting unit are as follows:
|
|
Book Values |
Fair Values |
|
Identifiable Assets |
$270,000 |
$300,000 |
|
Goodwill |
150,000 |
? |
|
Liabilities |
180,000 |
180,000 |
(c) The cash flows expected to be generated by the customer list are $12,000 in 2009 and $8,000 in 2010.
Instructions: The appropriate discount rate for all items is 6%. Make all journal entries necessary on December 31, 2008, in connection with these three intangible assets.