Company owns a trademark that was purchased for $340,000 several years ago
Company owns a trademark that was purchased for $340,000 several years ago. Company plans to renew the trademark for an indefinite amount of years. Company also has goodwill that was resulted from a business purchase several years ago. The purchased business is operating as the "Lakewood division" of Company and qualifies as a reporting unit. At 12/31/Year6, before and adjusting entries, Company's accounts show the following amounts:
$340,000 Trademark.
$700,000 Goodwill.
At 12,31,Year6, Company has determined that the trademark has a fair value of $420,000 and the Lakewood Division has a fair value of $1,600,000. The carrying value of the Lakewood Division at 12/31/Year6 is $1,702,000.
Record any entries that might be needed on December 31, Year6, regarding:
A. trademark
B. goodwill.
Show any computations after the entries. State N/A if no entry is needed.
Label the entries clearly as part A or part B.
please explain how you got your answers in short paragraph format
Best Answer
A. Part A requires an adjustment entry for the trademark's carrying value based on its fair value at 12/31/Year6. Since the fair value of the trademark is $420,000, an adjustment of $80,000 ($420,000 - $340,000) should be recorded as an increase to the trademark's carrying value. The entry to record this adjustment would be:
Trademark $80,000
This entry recognizes the impairment loss and reduces the carrying value of goodwill by the amount of the impairment loss.
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