Question

Bailey Company was formed in January 2017 and is preparing its financial statements in compliance with GAAP for the first time at the end of 2019. The company's general ledger at December 31, 2019 includes the following balance:

Patent $120,000

Copyright $140,000

Trade Name $150,000

Computer Software $90,000

Start-up Costs $30,000

Intellectual Capital $150,000

Goodwill $90,000

As recently hired accountant for Bailey, you have been asked to make sure that the company's accounting for intangible assets follow GAAP. Based on your investigation, you determine the following:

A. The patent was acquired in January 2019 has an expected life of 15 years and no residual value. It is expected to generate approximately equal benefits each year.

B. Bailey will use the copyright and trade name for the foreseeable future.

C. The company software was purchased in April 2019 and is used in the Bailey's 20 Offices around the country. It is expected to be replaced with new software in April 2021.

D. Bailey previous capitalized the expected value of its "human resources" as intellectual capital, with a corresponding increase to additional paid in capital.

E. The trade name and goodwill arose from an acquisition of a subsidiary company at the end of 2018. Because of a significant adverse change in the market, you decide that both these assets are impaired. You estimate that the fair value of the trade name is $50,000. The subsidiary company, which qualifies as a reporting unit, has a book value of $500,000, including the goodwill of $90,000. You estimate the subsidiaries fair value is $300,000, of which $250,000 is allocated to its identifiable assets and liabilities.

INSTRUCTIONS:

1. Assuming no adjusting entries have been made, prepare the adjusting journal entries to provide the correct information at the end of 2019.

2. Determine the balance for each intangible asset that will be reported on Bailey’s December 31, 2019 Balance sheet.

3. Identify the accounts and associated amounts that would be shown of Bailey’s December 31, 2019 Income Statement under expenses.

****Please show all supporting calculations to show how you received your answer****

Answer 1

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