Q9-34PGA - Horngren'S Financial And Managerial Accounting

Question

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.

Step-by-Step Solution

Answer

Answer

 Goodwill is $230,000

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.