The Bailey Company was formed in January 2005 and is preparing its financial statements under GAAP for

Question:

The Bailey Company was formed in January 2005 and is preparing its financial statements under GAAP for the first time at the end of 2007. Its general ledger at December 31, 2007 includes the following assets:

Patent ........... $120,000

Tradename ........ 150,000

Computer software ...... 90,000

Organization costs ....... 30,000

Research and development ... 250,000

Intellectual capital ..... 150,000

Goodwill .......... 90,000

As the recently hired accountant for the company, you have been asked to make sure that the company’s accounting for intangibles follows GAAP. You know that, because the company has never issued financial statements according to GAAP, any adjustments that are made to correct violations of GAAP are recorded as an adjustment to its retained earnings. You determine that the patent has an expected life of 15 years at the end of 2007 and no residual value, and that it will generate approximately equal benefits each year. You also determine that the company will use the copyright and tradename for the foreseeable future. The computer software is used in the company’s 20 offices around the country; it was replaced in 40% of the offices in 2007 and will be replaced in the remaining offices next year. On further examination, you find that the company had previously capitalized the expected value of its “human resources” as intellectual capital, with a corresponding increase in additional paid-in capital.

You also determine that the tradename and goodwill arose from an acquisition of a subsidiary company at the end of 2006. Because of a significant adverse change in the market, you decide that both assets are impaired. You estimate that the fair value of the tradename is $50,000. The subsidiary company has a book value of $500,000, including the goodwill of $90,000. You estimate that the subsidiary’s fair value is $300,000, of which $250,000 is allocated to its identifiable assets and liabilities.

Required

Prepare journal entries to provide the correct information under GAAP at the end of 2007.

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