In January 2015, Coaticook Inc. (Coaticook) purchased a patent for a pharmaceutical designed to help bald people to grow hair. The drug behind the patent was considered revolutionary at the time and Coaticook's management thought that purchasing the patent would provide it with a product that would reinvigorate sales and the company's stock price. Coaticook purchased the patent for $125 million. At the time of the purchase, the patent had 10 years left before it expired and it was being amortized on a straight-line basis. At purchase, management estimated the patent would generate an average of $22 million in net revenue (revenue less the cost of producing and selling the drug) per year over its remaining life. In 2015 and 2016, net revenues significantly exceeded expectations, but in mid-2017 a competing product came to market that was more effective than Coaticook's product, with fewer side effects. As a result, management slashed its estimate of the net revenues by 50 percent. A present value analysis of the estimated future cash flows produced an estimated value-in-use of the product in mid-2017 of $42 million. Management thinks it might be able to sell the patent for about $7 million.

It's July 2017. Coaticook's management has approached you for advice on how it should account for, if at all, the change in market conditions for its product in its June 30, 2017 second quarter financial statements. Management would like you to fully explain your reasoning and to provide any journal entries required to deal with the problem. They would also like your opinion on what effect this information will have on the com pany's stock price and on its performance for the year.

  • CreatedFebruary 26, 2015
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