Problem
Metlock Golf Inc. was formed on July 1, 2014, when Matt Magilke purchased the Golf School Company. Golf School Company provides video golf instruction at kiosks in shopping malls. Matt Magilke plans to integrate the instructional business into his golf equipment and accessory stores. Matt Magilke paid $770,000 cash for all the net assets of Golf School Company. At the time, Golf School Company's balance sheet reported assets of $650,000 and liabilities of $200,000 (thus owners' equity was $450,000). The fair value of Golf School Company's assets was estimated to be $800,000. Included in the assets is the Golf School Company trade name with a fair value of $10,000 and a copyright on some instructional books with a fair value of $24,000. The trade name has a remaining life of 5 years and can be renewed at nominal cost indefinitely. The copyright has a remaining life of 40 years.
No impairment was recorded in 2014 and 2015. However, the Golf School is losing money. At the end of 2016, the book value was $500,000. The fair value of the Gold School reporting unit at 12/31/16 was $420,000. The implied value of goodwill is $90,000. The controller also provided the following information related to the company's intangible assets at 12/31/16.
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Trade names
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Copyrights
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Expected Cash Flows (undiscounted)
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$9,000
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$30,000
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Fair Values
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$3,000
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$25,000
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Required:
1. For each of the items, what are possible reasons why no impairment was recorded in 2014 and 2015? (Provide references from the FASB codification.)
2. What considerations will be made to determine if impairment will be recorded in 2016? (Provide references from the FASB codification.)
3. How is anything related to intangibles would appear on the balance sheet and income statement on a comparative basis for 2016, 2015, and 2014?
4. What items will need to be monitored in future years that will continue to impact the carrying value of the intangibles.