Computing Impairment of Patent In January of Year 1, Idea Company purchased a patent for a new consumer product for $442,000. 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 Year 5, 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 of Year 5 are estimated to be $208,000 while the fair value of the patent is estimated to be $180,180. Total estimated useful life remains unchanged. Required a. Determine annual amortization expense for Year 1 through Year 5. b. Determine the carrying value of the patent on December 31 of Year 5, before assessing for impairment. c. What amount should Idea record as an impairment loss (if any) in Year 5? d. What is the adjusted carrying value of the patent on December 31 of Year 5? e. Assume that the potential health hazard was resolved in Year 6. As a result, the future cash flows from the patent on December 31 of Year 6 are estimated to be $169,000 while the fair value of the patent is estimated to be $140,400. What amount should Idea record as a loss (or recovery) on impairment (if any) in Year 6? f. What is the adjusted carrying value of the patent on December 31 of Year 6?
Computing Impairment of Patent In January of Year 1, Idea Company purchased a patent for a new consumer product for $442,000. 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 Year 5, 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 of Year 5 are estimated to be $208,000 while the fair value of the patent is estimated to be $180,180. Total estimated useful life remains unchanged. Required a. Determine annual amortization expense for Year 1 through Year 5. b. Determine the carrying value of the patent on December 31 of Year 5, before assessing for impairment. c. What amount should Idea record as an impairment loss (if any) in Year 5? d. What is the adjusted carrying value of the patent on December 31 of Year 5? e. Assume that the potential health hazard was resolved in Year 6. As a result, the future cash flows from the patent on December 31 of Year 6 are estimated to be $169,000 while the fair value of the patent is estimated to be $140,400. What amount should Idea record as a loss (or recovery) on impairment (if any) in Year 6? f. What is the adjusted carrying value of the patent on December 31 of Year 6?
Chapter1: Financial Statements And Business Decisions
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Transcribed Image Text:### Computing Impairment of Patent
In January of Year 1, Idea Company purchased a patent for a new consumer product for $442,000. At the time of purchase, the remaining legal life of the patent was 17 years. However, due to the competitive nature of the market, the patent was estimated to have a useful life of 10 years. During Year 5, 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 of Year 5 are estimated to be $208,000, while the fair value of the patent is estimated to be $180,180. The total estimated useful life remains unchanged.
#### Required
a. Determine annual amortization expense for Year 1 through Year 5.
b. Determine the carrying value of the patent on December 31 of Year 5, before assessing for impairment.
c. What amount should Idea record as an impairment loss (if any) in Year 5?
d. What is the adjusted carrying value of the patent on December 31 of Year 5?
e. Assume that the potential health hazard was resolved in Year 6. As a result, the future cash flows from the patent on December 31 of Year 6 are estimated to be $169,000, while the fair value of the patent is estimated to be $140,400. What amount should Idea record as a loss (or recovery) on impairment (if any) in Year 6?
f. What is the adjusted carrying value of the patent on December 31 of Year 6?
#### Calculations Table
| Calculations | Amount |
|---------------------------------------------------------|---------|
| a. Annual amortization expense | $44,200 |
| b. Carrying value of patent, Dec. 31, Year 5, before impairment testing | $221,000 |
| c. Impairment loss recognized in Year 5 | $40,820 |
| d. Adjusted carrying value of patent, Dec. 31, Year 5 | $180,180 |
| e. Impairment loss recognized in Year 6 | $0 |
| f. Adjusted carrying value of patent, Dec. 31, Year 6 | $140,400 |
This example illustrates how a patent may be amortized over its useful life and how
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