Question: PCG, Ltd. is in the process of
PCG, Ltd. is in the process of assessing the valuation of its intangible assets. At the end of the current year, management reported the following intangible assets.
The firm acquired the franchise 2 years ago and estimates that it has a 5-year useful life with no residual value. PCG uses the straight-line depreciation method. The permit is renewable every three years for an indefinite period of time. PCG management is concerned about the value of its franchise. The products sold under the franchise agreement have been experiencing sales declines over the past 2 years, prompting the company to test for impairment. It classifies the trademark and the renewable permit as indefinite-life intangible assets and must test for impairment on an annual basis. Management is unable to determine fair values from the market for the intangibles but provides the following cash-flow projections related to each of its
intangible assets; The company’s cost of capital is 5%.
Required:
a. Conduct an impairment test for PCG’s intangible assets.
b. Prepare the journal entries required to record the impairment loss, if any.
c. Compute the amount of the annual amortization for the franchise for years subsequent to the impairment test.
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