08 Jun Question Express Dry-Cleaning, one of your audit
Question
Express Dry-Cleaning, one of your audit clients, is a growing manufacturer of dry-cleaning
products in the United States. The company manufactures the chemicals used by dry-cleaning
stores, as well as operates a small at-home segment. To expand sales, Express decided to acquire
Deluxe Dry-Cleaning, one of the market leaders of at-home dry-cleaning.
In the purchase of Deluxe Dry-Cleaning, Express acquired a trademark with a current remaining
life of five years; however, the trademark is renewable every ten years. Deluxe’s business is part
of Express’s home product reporting unit. At the annual impairment test date, the net assets (i.e.
the carrying amount) of this reporting unit are $4,000,000, including tangible assets of
$2,200,000, a trademark of $400,000, and goodwill of $1,400,000. On the other hand, the fair
value of the reporting unit is only considered to be $3,400,000, which includes tangible assets
worth $2,200,000, the trademark worth $300,000, and internally developed, unrecognizable
intangible patents worth $100,000. Although Express now believes it overpaid for the business,
it still expects the division to generate profits for years to come. Assume that the reporting unit
does not have any liabilities and that no amortization has been recorded for the trademark or the
goodwill.
As for the trademark, Express plans to continuously renew the trademark, and analysis of the
product and industry supports its ability to do so without substantial cost. Express has also
performed a sales and cash flow analysis of the trademarked product and strongly feels that the
trademark will generate cash flows for Express for an indefinite time period as Express does not
believe that there are competitive, contractual, regulatory, or obsolescence factors that will
impact generation of cash flows from the trademark.
Your audit manager asks you whether Express should be amortizing the trademark. In
addition, she wants to know if impairment losses should be recorded for the trademark and
the goodwill. Determine the implied value of the goodwill and write a memo to the audit
file discussing the proper accounting treatment for the trademark and the goodwill. Ignore
any income tax effects and assume the “qualitative assessment” of goodwill has already
been performed. Use FASB codification for the excercise.
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