ISB FADM 2021

Practice Set 6: Intangible Assets and Intercorporate investments

QUESTION 1
SOLUTION
a. The acquisition included total assets of $2,652 million. Of that, $2,145 million (or 77%)
was allocated to intangible assets, detailed below.

Goodwill $ 878

Brand 948

Customer relationships 203

Favorable lease 16

Total $2,045

a. All of the assets and liabilities of Versace (the acquired company) are reported on Capri’s
consolidated balance sheet at their fair values on the date of the acquisition, not at their
net book values.

b. The intangible assets with a determinable life are amortized (depreciated) over their
useful lives. Intangible assets with an indeterminate useful life are not amortized, but are
tested annually for impairment, or more often if circumstances require. Goodwill is in this
latter category.

c. Goodwill is reported on the consolidated balance sheet at $848 million and it is not
routinely amortized but rather, tested for impairment at each balance sheet date. Capri
Holdings will consider the fair value of Versace and if that value falls below the investment
carrying value (which is $2.005 billion at December 31, 2018), then Capri would consider
goodwill to be impaired.
QUESTION 2

Kritika Company incurred costs of Rs. 7,50,000 to develop a specific new product in fiscal
2019. Of that amount, Rs. 3,00,000 was incurred up to the point at which the technical
feasibility of the product could be demonstrated and other recognition criteria were met.

In 2020, the company spent an additional Rs. 6,00,000 for product development.

The product was available for sale on 3 January 2021 with the first shipment to the customer
occurring in mid-January, 2021. Sales of the product are expected to continue for four years,
at which point the company thinks a replacement product will need to be developed. The
company believes that 2 million units will be sold during the product’s four-year economic
life, with 8,00,000 units expected to be sold in 2021. Assuming that the company follows Ind
AS, answer the following questions -

a) Explain how the company would treat the amount spent in 2019.
b) How would the additional costs in 2020 affect the balance sheet and income
statement, if we assume that all recognition criteria continued to be met.
c) What is the carrying value (book value) of the development cost asset on 1 January
2021?
d) Determine the expected amortization expense for 2021.

SOLUTION
a) The company would expense the Rs. 3,00,000 on the 2020 income statement
because it did not meet the capitalization criteria. The balance of the costs, Rs.
4,50,000 would be capitalized as an intangible asset called Development costs.
b) The 6,00,000 of product development costs in 2020 would be capitalized if, like in
2019, technical feasibility of the product can be demonstrated and other recognition
criteria are met.
c) Carrying amount = 4,50,000 + 6,00,000 = 10,50,000.
d) Units produced in 2021 (expected) = 8,00,000
Total units expected to be produced = 20,00,000
Percent produced in 2021 = 8,00,000 / 20,00,000 = 40%
Amortization expense in 2021 = 10,50,000 × 40% = 4,20,000
 QUESTION 3

SOLUTION

Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Rev- Expen- Net

Transaction + = + + – =
Asset Assets ities Capital Capital enues ses Income
MS 216,000
Cash 216,000 1. Purchased
18,000
MS common
-216,000 +216,000
216,000 shares of = – =
Cash Investment
Baez Inc.,
Cash
for $12 per
share
216,000

Cash 21,600 2. Received a

DI 21,600 cash
dividend of +21,600 +21,600
Cash +21,600
$1.20 per = Retained Dividend – = +21,600
21,600 Cash
common Earnings Income
share from
DI Baez
21,600

UL 13,500 3. Year-end
MS 13,500 market price
of Baez -13,500 +13,500
UL -13,500
common = Retained – Unrealized = –13,500
13,500 Investment
stock is Earnings Loss
$11.25 per
MS share.
13,500

Cash 213,600
GN 11,100
MS 202,500
4. Sold all
Cash 18,000
+11,100 +11,100
213,600 common +213,600 -202,500
= Retained Gain on – = +11,100
shares of Cash Investment
Earnings Sale
Baez for
GN $213,600
11,100

MS
202,500
 QUESTION 4

SOLUTION

Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Rev- Expen- Net

Transaction + = + + – =
Asset Assets ities Capital Capital enues ses Income
MS 320,000
Cash 320,000 1. Purchased
20,000
MS common
-320,000 +320,000
320,000 shares of = – =
Cash Investment
Heller Co. at
$16 per
Cash
share
320,000

Cash 25,000 2. Received a

DI 25,000 cash
dividend of +25,000 +25,000
Cash +25,000
$1.25 per = Retained Dividend – = +25,000
25,000 Cash
common Earnings Income
share from
DI Heller
25,000

MS 30,000 3. Year-end
UG 30,000 market price
of Heller +30,000 +30,000
MS +30,000
common = Retained Unrealized – = +30,000
30,000 Investment
stock is Earnings Gain
$17.50 per
UG share
30,000

Cash 315,600
LS 34,400
MS 350,000
4. Sold all
20,000
Cash common -34,400 +34,400
315,600 +315,600 -350,000
shares of = Retained – Loss on = –34,400
Cash Investment
Heller for Earnings Sale
LS $315,600
34,400 cash

MS
350,000
 QUESTION 5

SOLUTION

Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Rev- Expen- Net

Transaction + = + + – =
Asset Assets ities Capital Capital enues ses Income
EMI 108,000 a. Purchased
Cash 108,000 12,000
common
EMI
shares of
108,000 Bakersfield
Co. at $9 per -108,000 +108,000
Cash = – =
share; the Cash Investment
108,000 shares
represent
30%
ownership in
Bakersfield
Cash 15,000
EMI 15,000 b. Received a
cash dividend
Cash of $1.25 per +15,000 -15,000
15,000 = – =
common Cash Investment
share from
EMI Bakersfield
15,000
EMI 18,000
EI 18,000 c. Recorded
income from
EMI Bakersfield
18,000 stock +18,000 +18,000
+18,000
investment = Retained Equity – = +18,000
Investment
EI when Earnings Income
18,000
Bakersfield's
net income is
$60,000

Cash 114,500
EMI 111,000
GN 3,500
d. Sold all
Cash 12,000
114,500 +3,500 +3,500
common +114,500 -111,000
= Retained Gain – = +3,500
shares of Cash Investment
Earnings on Sale
EMI Bakersfield for
111,000 $114,500

GN
3,500
QUESTION 6

SOLUTION

Consolidating
Liu Reed Adjustments Consolidated
Current assets ................. $950,000 $70,000 $1,020,000
Investment in Reed ......... 380,000 $(380,000) 0
PPE, net........................... 1,600,000 305,000 27,000 1,932,000
Goodwill ........................... . . 33,000 33,000
Total assets ..................... $2,930,000 $375,000 $2,985,000

Liabilities .......................... $ 450,000 $ 55,000 $ 505,000

Contributed capital .......... 1,850,000 280,000 (280,000) 1,850,000
Retained earnings ........... 630,000 40,000 (40,000) 630,000
Total liabilities &
stockholders’ equity ....... $2,930,000 $375,000 $2,985,000