A10- 20 Asset Impairment: Sotsweat Incorporated is a software development company. It has several products on the market, including the widely used PlayMark animation software. he cash flows from PlayMark are clearly distinguishable within Sotsweat. he company has recorded development costs of $ 2.8 million relating to PlayMark, which is being amortized on a straight- line basis over seven years. At the end of 20X5, the carrying value was $ 1,960,000. Sotsweat maintains a separate account for accumulated amortization on PlayMark. In 20X5, a large U. S. company, Macrosotie, released a competing product that has been hailed as a substantial improvement over PlayMark. However, the competing product requires installation of a great deal of additional Macrosotie software to make the new product run deficiently. In addition, the high price may delay its acceptance by some users. Because of the new competition, Sotsweat management decided that an impairment test should be made. In January 20X6, as the 20X5 financial statements were being prepared, the company hired a professional business valuator. he valuator’s appraisal was that the fair value of PlayMark at the end of 20X5 was $ 1,000,000. Required: 1. Prepare the necessary adjusting journal entry to record the results of the impairment test. 2. Suppose that in 20X6, the Macrosotie product was found to be unreliable and that the sales of PlayMark returned to almost their 20X4 level. he fair value of PlayMark there-fore was $ 1,600,000 at the end of 20X6. How ( if at all) would this change be recorded in Sotsweat’s financial statements for 20X6?
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