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Chapter 12: Q12-6BE (page 638)

Kenoly Corporation owns a patent that has a carrying amount of \(300,000. Kenoly expects future net cash flows from this patent to total \)210,000. The fair value of the patent is $110,000. Prepare Kenoly’s journal entry, if necessary, to record the loss on impairment.

Short Answer

Expert verified

Expected net future cash flows ($210,000) are less than the carrying value ($300,000), resulting in impairment. The difference between the carrying amount and fair value ($110,000) is used to calculate the loss.

Step by step solution

01

Step-by-Step SolutionStep 1: Calculation

Patents are limited-life intangible assets; hence an impairment test is required in two steps.

1: Compare the carrying amount to the future net cash flows; impairment is necessary if the carrying amount exceeds the future net cash flows.

2: Determine the impairment loss by subtracting the carrying amount from the fair value.

02

Journal Entry

Date

Particulars

JF

Debit

Credit

Loss on Impairment ($300,000 - $110,000)

$190,000

Patents

$190,000

(Being Impairment loss is recorded)

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Most popular questions from this chapter

Explain how to account for the impairment of held-to-maturity debt security.

Question: (Recording and Amortization of Intangibles) Marshall Company, organized in 2016, has set up a single account for all intangible assets. The following summary discloses the debit entries that have been recorded during 2017.

1/2/17

Purchased patent (8-year life)

\( 350,000

4/1/17

Purchase goodwill (indefinite life)

360,000

7/1/17

Purchased franchise with 10-year life; expiration date 7/1/27

450,000

8/1/17

Payment of copyright (5-year life)

156,000

9/1/17

Research and development costs

215,000

\)1,531,000

Instructions

Prepare the necessary entries to clear the Intangible Assets account and to set up separate accounts for distinct types of intangibles. Make the entries as of December 31, 2017, recording any necessary amortization and reflecting all balances accurately as of that date. (Use straight-line amortization.)

Margaret Avery Company from time to time embarks on a research program when a special project seems to offer possibilities. In 2015, the company expends \(325,000 on a research project, but by the end of 2015, it is impossible to determine whether any benefit will be derived from it.

  1. What account should be charged for the \)325,000, and how should it be shown in the financial statements?
  2. The project is completed in 2016, and a successful patent is obtained. The R&D costs to complete the project are \(130,000 (\)36,000 of these costs were incurred after achieving economic viability). The administrative and legal expenses incurred in obtaining patent number 472-1001-84 in 2016 total \(24,000. The patent has an expected useful life of 5 years. Record these costs in the journal entry form. Also, record patent amortization (full year) in 2016.
  3. In 2017, the company successfully defends the patent in extended litigation at a cost of \)47,200, thereby extending the patent life to December 31, 2024. What is the proper way to account for this cost? Also, record patent amortization (full year) in 2017.
  4. Additional engineering and consulting costs incurred in 2017 required to advance the design of a new version of the product to the manufacturing stage total $60,000. These costs enhance the design of the product considerably, but it is highly uncertain if there will be a market for the new version of the product. Discuss the proper accounting treatment for this cost.

What are the two main characteristics of intangible assets?

Use the information from BE17-1 but assume the bonds are purchased as an available-for-sale security. Prepare Garfield’s journal entries for (a) the purchase of the investment, (b) the receipt of annual interest and discount amortization, and (c) the year-end fair value adjustment. (Assume a zero balance in the Fair Value Adjustment account.) The bonds have a year-end fair value of $75,500.
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