BKAR2023 FINANCIAL ACCOUNTING AND REPORTING II (A162)

MINI CASE 4
INTANGIBLE ASSETS
DUE DATE: 12 March 2017 (Sunday) before 4.00 pm

QUESTION 1

Presented below is information related to copyrights owned by Belanga Bhd at 31 December

2015.

Cost RM8,600,000
Carrying amount 4,300,000
Recoverable amount 3,400,000

Assume that Belanga Bhd will continue to use this copyright in the future. As of 31 December
2015, the copyright is estimated to have a remaining useful life of 10 years.

REQUIRED:

(a) Prepare the journal entry (if any) to record the impairment of the asset at 31 December
2015.

(b) Prepare the journal entry to record amortization expense for 2016 related to the copyrights.

(c) The fair value of the copyright at 31 December 2016 is RM3,500,000. Prepare related
journal entry.

ANSWER

(a) December 31, 2015

Loss on Impairment................................................................... 900,000*
Copyrights...................................................................... 900,000

*Carrying amount...................................... $4,300,000

Recoverable amount................................. (3,400,000)
Loss on impairment.................................. $ 900,000

(b) Copyright Amortization Expense............................................... 340,000*

Copyrights...................................................................... 340,000

*New carrying amount............................... $3,400,000

Useful life................................................. ÷ 10 years
Amortization per year............................... $ 340,000

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(c) Copyright ($3,500,000) – ($3,400,000 – $340,000)………….. 440,000
Recovery of Impairment Loss......................................... 440,000

QUESTION 2

On 1 July 2013, Blackie Bhd acquired a patent for its new product at a cost of RM2,000,000.
The estimated useful life of the patent is ten years. The management of the company,
however, was not able to determine reliably the pattern in which the patent’s economic
benefits are consumed. On 31 December 2014, the company revalued the patent to market
value of RM2,600,000. Due to significant decline in demand of the product, the company
revalued the patent downwards to RM1,400,000 on 31 December 2015.

Meanwhile, on 1 January 2016, as part of Blackie Bhd business expansion strategies it

acquired all of the ordinary shares of Whittier Sdn Bhd. Whittier Sdn Bhd has become a
division (cash generating unit) of Blackie Bhd. It was determined at the acquisition date that
the different between the fair value of the identifiable net assets of Whittier division with the
cash consideration paid was RM700,000. After 10 months of operations, Whittier experienced
operating losses. In addition, it is expected that Whittier division will generate substantial
losses for the foreseeable future. At 31 December 2016, carrying amount of Whittier’s
division net assets is RM1,760,000. Meanwhile, its recoverable amount on that date as
determined by professional appraisers is RM1,450,000. Blackie Bhd’s year end is 31
December. The company uses revaluation model to recognise the patent.

REQUIRED:
(Round your answer to the nearest RM)

(a) Identify method of amortisation that should be used to amortise the patent (justify your
answer). Prepare journal entries necessary to record amortisation expense in 2013 and
2014 and increase in market (fair) value of the patent in 2014.

(b) Prepare journal entries necessary to record amortisation expense, gradual realisation of
the revaluation surplus, and decrease in market (fair) value of the patent in 2015.

(c) Determine the impairment loss (if any) of Whittier division on 31 December 2016 and
prepare the journal entry to record the impairment loss.

(d) Assume that goodwill arises from the acquisition of Whittier division is less than the
amount of the impairment loss computed in (c). How should the impairment loss being
allocated?

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 ANSWER

(a) If the pattern in which intangible asset’s economic benefits are consumed cannot be
determined reliably, the straight- line method should be adopted to amortise the patent
(para 97, MFRS 138):

RM2,000,000/10 years = RM200,000 per year

2013:

Dr Amortisation expense 100,000 (RM200K x 6/12)

Cr Accumulated amortisation 100,000

2014:

Dr Amortisation expense 200,000

Cr Accumulated amortisation 200,000

Dr Accumulated amortization 300,000

Dr Intangible asset 600,000
Cr Unrealised Gain on revaluation-I.Asset 900,000

(b) 2015:

Dr Amortisation expense 305,882 (2.6m/8.5years)

Cr Accumulated amortisation 305,882

To record gradual realisation of the revaluation surplus (the different between

amortisation based on the revalued amount of the IA and depreciation based on the
IA’s original costs).

Dr Revaluation Reserve/AOCI (305,882-200,000) 105,882

Cr Retained earnings 105,882

Dr Unrealised Gain on revaluation-I.Asset (900,000-105,882) 794,118

Accumulated Amortisation 305,882
Loss on Impairment 100,000
Cr Intangible asset (2.6M-1.4M) 1,200,000

(c) Goodwill = Excess of the cost of the division over the fair value of the identifiable
assets: RM700,000

Computation of impairment:
Goodwill impairment = Recoverable amount of Whitier division less the carrying value
of the division:
Recoverable amount of Whitier division RM1,450,000
Carrying value of division 1,760,000

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 Impairment loss (RM 310,000)

Loss on Impairment................................................................
310,000
Goodwill impairment 310,000

(d) If amount of goodwill is not enough to absorb the impairment loss of CGU/Whitier
division, the remaining balance of impairment loss will be is allocated to all other
assets in the CGU/ Whitier division on a pro rata basis.

QUESTION 3

During 2014 Peach Bhd spent RM170,000 in research costs. As a result a new product called
New Destiny was patented. The patent was obtained on 1 October 2014, and had a legal life
of 20 years and a useful life of 10 years. Legal costs of RM24,000 related to the patent were
incurred as of 1 October 2014.

Required:

(a) Prepare all journal entries required in 2014 and 2015.

(b) On 1 June 2016, Peach Bhd spent RM12,400 to successfully prosecute a patent
infringement suit. As a result, the estimated of useful life was extended to 12 years from
1 June 2016. Prepare all journal entries required in 2016 and 2017.
(c) In 2018, Peach Bhd determined that a competitor’s product would make the New Destiny
obsolete and the patent worthless by 31 December 2019. Prepare l journal entries to
record amortization of the patent in 2018 and 2019.

Answer:
(a) 2014 Research and Development Expense.............................................................
170,000
Cash....................................................................................................
170,000

Patents 24,000
Cash....................................................................................................
24,000

Amortization Expense....................................................................................
600
Accumulated Amortisation -Patent 600
[(RM24,000 ÷ 10) X 3/12].............................................................................

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 2015 Amortization Expense....................................................................................
2,400
Accumulated Amortisation- Patent 2,400
(RM24,000 ÷ 10)...........................................................................................

(b) 2016 Patents 12,400

Cash....................................................................................................
12,400

Amortization Expense....................................................................................
2,575
Accumulated Amortisation-Patent (RM1,000 + 2,575
RM1,575).......................................................................................................
[Jan. 1–June 1: (RM24,000 ÷ 10) X
5/12 = RM1,000
June 1–Dec. 31: (RM24,000 – RM600 –
RM2,400 – RM1,000 + RM12,400) =
RM32,400;
(RM32,400 ÷ 12) X 7/12 = RM1,575]

2017 Amortization Expense....................................................................................

2,700
Accumulated Amortisation-Patent (RM32,400 2,700
÷ 12)

(c) 2018 and 2019

Amortization Expense....................................................................................
14,063
Accumulated Amortisation-Patent (RM28,125 ÷ 2)................................ 14,063
(RM32,400 – RM1,575 – RM2,700) = RM28,125