Rho  Inc.,  a  public  company, is  a  software  development  company which  has  several products on the market, including  the widely used Playmark animation software. The company has recorded development costs   of  $2.8 million  relating   to PlayMark, which is being amortised  on a straight-line basis  over  seven years. At the end of  2019, the carrying value was  $1,960,000. Rho maintains  a separate account for accumulated amortization on  Playmark.

In 2019,   another  company, Gamma Inc.  released a  competing  product that  has been hailed as  a substantial improvement  over PlayMark.  Because of the new competition,  Rho’s  management  decided  that an impairment  test should be made.  Playmark was  appraised  to have a  fair value of $1,000,000 at the end of 2019. Its value in use was estimated to be $900,000 and the selling costs were considered to be negligible.  In addition, the  sum of future undiscounted cash flows  associated with Playmark was estimated  to be $1,500,000.

Required:

1. Prepare any   necessary   adjusting entry by  Rho Inc.  to record  the results of the impairment test at the end of 2019. (4 marks)
2. Suppose  that in 2020, the Gamma product was found to be unreliable and that the sales of Playmark  returned to almost their 2018 level. The fair value (and recoverable amount) of Playmark therefore was $1,600,000  at the end of 2020. How (if at all)  would this  change  be recorded in Rho’s  financial statements in 2020? (4 marks)

Answer rating: 100% (QA)

Ans 1 Higher of a Fair value less cost to sell 1000000 b Value in use 90000 ... View the full answer