Question

Data related to the acquisition of timber rights and intangible assets during the current year ended December 31 are as follows:

On December 31, the company determined that $750,000 of goodwill was impaired.

Governmental and legal costs of $6,480,000 were incurred on September 30 in obtaining a patent with an estimated economic life of 10 years. Amortization is to be for one-fourth of a year.

Timber rights on a tract of land were purchased for $1,170,000 on February 4. The stand of timber is estimated at 6,500,000 board feet. During the current year, 1,800,000 board feet of timber were cut and sold.

Required:

1. Determine the amount of the amortization, depletion, or impairment for the current year for each of the foregoing items. Do not round your intermediate calculation.

ItemImpairment, Amortization or Depletion Expense

a.$

b.$

c.$

Answer 1

Concepts

Amortization: Amortization is the process of allocating the cost of an intangible asset over its expected period of use.

Impairment of goodwill: An impairment of goodwill occurs when it’s carrying value exceeds its fair value on financial statements.

Depletion: Like amortization and depreciation, depletion is a process of allocating the cost of extracting natural resources.

Solution

a. As explained above goodwill turns into impaired when its carrying value exceeds its fair value on financial statements.

The company has determined the goodwill to be impaired at $750,000 on December 31. Hence, the loss on impairment of goodwill is $750,000.

b. Computation of amortization expenses of patents in the current year:

Given that,

Government and legal Cost incurred on September 30: $6,480,000

Estimated economic life: 10 years

Amortization period: 1/4th of the year

(Cost of the asset – Residual value)

The formula for amortization expenses = -------------------------------------------------- × Amortization period

                                                                         Estimated economic life

($6,480,000 – $0)

= ---------------------- × (1/4)

                                                                             10 years

The amortization expenses of patents in the current year = $162,000

c. Computation of depletion expenses for the current year

Given that,

Cost of the Timber rights on a tract of land: $1,170,000

Estimated number of units: 6,500,000 board feet

Number of units cut and sold: 1,800,000 board feet

(Cost of the asset – Salvage value)

Depletion cost per unit = --------------------------------------------------

                                             Total estimated units

($1,170,000– $0)

= ---------------------------

                                                 6,500,000 board feet

Depletion cost per unit = $0.18 per board feet

Depletion expenses = Depletion cost per unit × Number of units cut and sold

                                        = $0.18 per board feet × 1,800,000 board feet

Depletion expenses for the current year = $ 324,000