In January 2017, Idea Company purchased a patent for a new consumer product for $170,000. At the
Question:
In January 2017, Idea Company purchased a patent for a new consumer product for $170,000. At the time of purchase, the remaining legal life of the patent was 17 years. However, because of the competitive nature of the market, the patent was estimated to have a useful life of 10 years. During 2021, it was determined that there was a potential health hazard present in the product. As a result, the estimated future cash flows from the patent on December 31, 2021, are estimated to be $80,000 while the fair value of the patent is estimated to be $69,300. Total estimated useful life remains unchanged.
Required
a. Determine annual amortization expense for 2017-2021.
b. Determine the carrying value of the patent on December 31, 2021, before assessing for impairment.
c. What amount should Idea record as an impairment loss (if any) in 2021? What is the adjusted carrying value of the patent on December 31, 2021?
d. Assume that the potential health hazard was resolved in 2022. As a result, the future cash flows from the patent on December 31, 2022, are estimated to be $65,000 while the fair value of the patent is estimated to be $54,000.
What amount should Idea record as a loss (or recovery) on impairment (if any) in 2022? What is the adjusted carrying value of the patent on December 31, 2022?
Financial Reporting and Analysis
ISBN: 978-1259722653
7th edition
Authors: Lawrence Revsine, Daniel Collins, Bruce Johnson, Fred Mittelstaedt, Leonard Soffer