1- Montana Matt's Golf Inc. was formed on July 1, 2013, when Matt Magilke purchased the Old Master Golf Company. Old Master provides video golf instructions at kioskis in shopping malls. Magilke plans to integrate the instructional business into his golf equipment and accessory stores. Magilke paid $770,000 cash for Old Master. At the time, Old Master's balance sheet reported assets of $650,000 and liablities of $200,000 (thus owners' equity was $450,000). The fair value of Old Master's assets is estimated to be $800,000. Included in the assets is the Old Master 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.
Instructions:
a) Prepare the intangible assets section of Montana Matt's Golf Inc. at December 31, 2013. How much amortization expense is included in Montana Matt's income for the year ended December 31, 2013? Show all supporting computations.
b) Prepare the journal entry to record amortization expense for 2014. Prepare the intangible assets section of Montana's Matt Golf Inc. at December 31, 2014. (No impairments are required to be recorded in 2014).
c) At the end of 2015, Magilke is evaluating the results of the instructional business. Due to fierce competition from online and television (e.g., Golf Channel), the Old Master reporting until has been losing money. Its book value is now $500,000. The fair value of the Old Master reporting unit is $420,000. The implied value of goodwill is $90,000. Magilke has collected the following information related to the company's intangible assets.
Intangible AssetsExpected Cash Flows (undiscounted)Fair Values
Trade Names $ 9,000 $ 3,000
Copyrights $30,000 $25,000
Prepare the journal entries required, if any, to record impairments on Montana Matt's intangible assets. (Assume that any amortization for 2015 has been recorded.) Show supporting computations.
2- Your client, Cascade Company, is planning to invest some of its excess cash in 5-year revenue bonds issued by the county and in the stock of its supliers, Tenton Co. Teton's shares trade on the over-the-counter market. Cascade plans to classify these investments as available-for-sale. They would like you to conduct some research on the accounting for these investments.
Instructions:
If your school has a subscription to the FASB Codification, go to https://aaahq.org/ascLogin.cfm to log in and prepare responses to the following. Provide Codification references for your responses.
a) Since Teton shares do not trade on one of the larger stock markets, Cascade argues that the fair value of this investments is not really available. According to the authoritative literature, when is the fair value of a security "readily determinable"?
b) How is an impairment of a security accounted for?
c) To avoid violability in their financial statements due to the fair value adjustments, Cascade debated whether to bond investments could be classified as held-to-maturity; Cascade is pretty sure it will hold the bonds for 5 years. How close to maturity could Cascade sell an investment and still classify it as held-to-maturity?
d) What disclosures must be made for any sale or transfer from securities classified as held-to-maturity?
3. Comparative Analysis Case - The Coca-Cola Company and Pepsi Co.
Instructions:
Go to the book's companion website and use information found there to answer the following questions related to The Coca-Cola Company and Pepsi Co, Inc.
a) (1) What amounts for intangible assets were reported in their respective balance sheets by Coca-Cola and Pepsi Co?
(2) What percentage of total assets is each of these reported amounts?
(3) What was the change in the amount of intangibles from 2010 to 2011 for Coca-Cola and Pepsi Co?
b) (1) On what basis and over what periods of time Coca-Cola and Pepsi Co amortize their intangible assets?
(2) What were the amounts of the accumulated amortization reported by Coca-Cola and Pepsi Co at the end of 2011 and 2010?
(3) What was the composition of the unidentifiable intangible assets reported by Coca-Cola and PepsiCo at the end of 2011?
4. - Financial Statements Analysis Case: Union Planters
Union Planters is a Tennesee bank holding company (that is, a corporation that owns banks). (Union Planters is now part of Region Bank). Union Planters manages $32 billion in assets, the largest of which is its loan portfolio at $19 billion. In addition to its loan portfolio, however, like other banks it has significant debt investments. The nature of these investments varies from short-term in nature to long-term in nature. As a consequence, consistent with the requirements of accounting rules, Union Planters reports its investments in two different categories - trading and available-for-sale. The following facts were found in a recent Union Planters' annual report.
| (all dollars in million) |
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
| Trading account assets |
275 |
|
|
275 |
| Securities availa ble for sale |
8,209 |
108 |
15 |
8,302 |
| Net income |
|
|
224 |
| Net securities gains (losses) |
|
9 |
Instructions:
a) Why do you suppose Union Planters purchases investments, rather than simply making loans? Why does it purchase investments that vary in nature both in terms of their maturities and in type (debt versus stock)?
b) How much Union Planters account for its investments in each of the two categories?
c) In what ways does classifying investments into two different categories assist inventors in evaluating the profitability of a company like Union Planters?
d) Suppose that the management of Union Planters was not happy with its net income for the year. What step could it have taken with its investment portfolio that would have definitely increased reported profit? How much could it have increased reported profit? Why do you suppose it chose not to do this?
5. - Accounting, Analysis, and Principles
Instar Company has several investments in the securities of other companies. The following information regarding these investments is available at December 31, 2014.
1. Instar holds bonds issued by Dorsel Corp. The bonds have an amortized cost of $320,000 and their fair value at December 31, 2014 is $400,000. Instar intends to hold the bonds until they mature on December 31, 2022.
2. Instar has invested idle cash in the equity securities of several publicity traded companies. Instar intends to sell these securities during the first quarter of 2015, when it will need the cash to acquire seasonal inventory. These equity securities have a cost basis of $800,000 and a fair value of $920,000 at December 31, 2014.
3. Instar has a significant ownership stake in one of the companies that supplies Instar with various components Instar uses in its products. Instar owns 6% of common stock of the supplier, does not have any representation on the supplier's board of directors, does not exchange any personnel with the supplier, and does not consult with the supplier on any of the suppliers' operating, financial or strategic decisions. The cost basis of the investment in the supplier is $1,200,000 and the fair value of the investment at December 31, 2014 is $1,550,000. Instar does not intend to sell the investment in the foreseeable future. The supplier reported net income of $80,000 for 2014 and paid no dividends.
4. Instar owns some common stock of Forter Corp. The cost basis of the investment in Forter is $200,000 and the fair value at December 31, 2014 is $50,000. Instar believes the decline in the value of its investment in Forter is other than temporary, but Instar does not intent to sell its investment in Forter in the foreseeable future.
5. Instar purchased 25% of the stock of Slobbaer Co, for $900,000. Instar has a significant influence over the operating activities of Slobbaer Co. During 2014, Slobbaer Co. reported net income of $300,000 and paid a dividend of $100,000.
Accounting:
a) Determine whether each of the investments described above should be classified as available-for-sale, held-to-maturity, trading, or equity method.
b) Prepare any December 31, 2014, journal entries needed for Instar relating to Instar's various investments in other companies. Assume 2014 is Instar's first year of operations.
Analysis:
What is the effect on Instar's 2014 net income (as reported on Instar's income statements) of Instar's investments in other companies?
Principles:
Briefly explain the different rationales for the different accounting and reporting rules for different types of investments in the securities of other companies.