National Sweetener Company owns the patent to the artificial sweetener known as Super- sweet. Assume that National
Question:
On December 31, 2014, when the patents book value was $160.0 million ($300.0 2 $140.0), National Sweetener learned that one of its competitors had developed a revolutionary new sweetener that could be produced much more economically than Supersweet. National Sweetener expects that the introduction of this product on January 1, 2015, will substantially reduce the cash flows from its Supersweet patent process.
Consider the following two independent scenarios:
Scenario I: National Sweetener expects that the cash flows from Supersweet over the period 20152019 will be only 50% of those originally projected and that the sale of the Supersweet patent will bring only $25 million when sold. When discounted at a rate of 15% (which National Sweetener feels is appropriate), these amounts yield a present value of $129.0 million. National Sweetener estimates that the market value of the Supersweet patent on December 31, 2014, is $160.0 million.
Scenario II: National Sweetener expects that the cash flows from Supersweet over the period
20152019 will be only 25% of those originally projected and that the sale of the Supersweet patent will bring only $25 million when sold. When discounted at a rate of 15%, these amounts yield a present value of $70.7 million. National Sweetener estimates that the market value of the Supersweet patent on December 31, 2014, is $68.0 million.
Required:
1. Should National Sweetener recognize an impairment of its Supersweet patent in Scenario I? If so, what is the amount of the loss and at what amount should the patent be reported in National Sweeteners 2014 ending balance sheet?
2. Repeat requirement 1 for the secondscenario.
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Related Book For
Financial Reporting and Analysis
ISBN: 978-0078025679
6th edition
Authors: Flawrence Revsine, Daniel Collins, Bruce, Mittelstaedt, Leon
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