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Q9-34PGA

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Horngren'S Financial And Managerial Accounting
Found in: Page 534

Short Answer

Accounting for intangibles

Midland States Telecom provides communication services in Iowa, Nebraska, the Dakotas, and Montana. Midland States Telecom purchased goodwill as part of the acquisition of Sheldon Wireless Enterprises, which had the following figures:

Book value of assets $ 900,000

Market value of assets 1,400,000

Market value of liabilities 530,000

Requirements

1. Journalize the entry to record Midland States Telecom’s purchase of Sheldon Wireless for $440,000 cash plus a $660,000 note payable.

2. What special asset does Midland States Telecom’s acquisition of Sheldon Wireless identify? How should Midland States Telecom account for this asset after acquiring Sheldon Wireless? Explain in detail.

Answer

Goodwill is $230,000

See the step by step solution

Step by Step Solution

Step 1: Meaning of Intangible Assets

The assets that increase the value of the business organization even without physical existence are known as intangible assets. Goodwill and patents are some of the intangible assets.

Step 2: Record journal entries

Date

Accounts & Explanation

Debit ($)

Credit ($)

Assets

1,400,000

Goodwill (refer working note)

230,000

Liabilities

530,000

Cash

440,000

Notes Payable

660,000

(To record purchase of Sheldon wireless)

Working note: Calculation of Goodwill

Particulars

Amount ($)

Purchase Price to acquire Sheldon Wireless ($440,000+$660,000)

$1,100,000

Market value of Sheldon Wireless Assets $1,400,000

Less: Market value of Sheldon Wireless Liabilities (530,000)

870,000

Goodwill

$230,000

Step 2: Special asset identified in acquisition 

Midland State Telecom will identify goodwill on the acquisition of Sheldon wireless. This goodwill arises because Midland has paid an amount of consideration that is more than the market value of the net assets of the Sheldon wireless.

Midland State Telecom will report goodwill of $230,000 on the balance sheet.

Most popular questions for Business-studies Textbooks

Question: P9-36B Determining asset cost and recording partial-year depreciation

Safe Parking, near an airport, incurred the following costs to acquire land, make land improvements, and construct and furnish a small building:

a

Purchase price of three acres of land

$86,000

b

Delinquent real estate taxes on the land to be paid by safe parking

6,300

c

Additional dirt and earth removing

8,400

d

Title insurance and the land acquisition

3,400

e

Fence around the boundary of the property

9,600

f

Building permit for building

900

g

Architect’s fee for design of building

20,100

h

Signs near the front of property

9,000

i

Material used to construct the building

217,000

J

Labor to construct the building

172,000

k

Interest cost on construction loan for the building

9,500

l

Parking lots on the property

29,400

m

Lights for parking lots

11,600

n

Salary of construction supervisor (80% to building; 20% to parking lot and concrete walks)

80,000

o

Furniture

11,700

p

Transportation of furniture from seller to the building

1,900

q

Additional fencing

6,900

Safe Parking depreciates land improvements over 15 years, buildings over 40 years, and furniture over 10 years, all on a straight-line basis with zero residual value.

Requirements

1. Set up columns for Land, Land Improvements, Building, and Furniture. Show how to account for each cost by listing the cost under the correct account. Determine the total cost of each asset.

2. All construction was complete and the assets were placed in service on September 1. Record partial-year depreciation expense for the year ended December 31. Round to the nearest dollar.

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