Question

Larkspur Industries has the following patents on its December 31, 2019, balance sheet. Patent Item Initial Cost Date Acquired Useful Life at Date Acquired Patent A $41,004 3/1/16 17 years Patent B $15,120 7/1/17 10 years Patent $14,880 9/1/18 4 years The following events occurred during the year ended December 31, 2020. 1. Research and development costs of $231.000 were incurred during the year. 2. Patent D was purchased on July 1 for $41,496. This patent has a useful life of 91/2years. 3. As a result of reduced demands for certain products protected by Patent B, a possible impairment of Patent B's value may have occurred at December 31, 2020. The controller for Larkspur estimates the expected future cash flows from Patent B will be as follows. Year Expected Future Cash Flows 2021 $1,850 2022 1,850 2023 1,850 The proper discount rate to be used for these flows is 8%. (Assume that the cash flows occur at the end of the year.)

Answer 1

Answer with full working is given below

Carrying value as on 31 December 2019, Balance Sheet Patent A Patent B Patent C Initial cost $41,004 $15,120 $14,880 Date 01/03/2016 01/07/2017 01/09/2018 Total life (years) Total life (months) 204 120 48 Amortization per month $201 $126 $310 10 $756 Amortization for 2016 Amortization for 2017 Amortization for 2018 Amortization for 2019 Total Amortisation $2,010 $2,412 $2,412 $2,412 $9,246 $1,512 $1,512 $3,780 $1,240 $3,720 $4,960 Carrying value as on 31st Dec 2019 $31,758 $11,340 $9,920 1 Research and Development expense will be treated as an expense $41,496 Amortisation for Patent D Purchase cost Life total (years) Life total (months) Amortisation per month 9.5 114 $364 3 Patent B checking for impairment Present value of cash flows Cash flow PV factor 2021 2022 2023 Present value of cash inflows $1,850 $1,850 $1,850 0.9259 0.8573 0.7938 PV of cash Flow $1,713 $1,586 $1,469 $4,768 Since present value of cash flow is lower than carrying value Patent B is impaired Impairment loss $6,572 Carrying value will be PV of cash flows $4,768 Patent D Patent C $9,920 Carrying value as on 31 December 2020, Balance Sheet Patent A Patent B Carrying value as on December 2019 $31,758 $11,340 Purchase cost- July 2020 Amortisation $2,412 Impairment Loss $6,572 $41,496 $2,184 $3,720 Carrying cost as on 31st Dec 2020 $29,346 $4,768 $6,200 $39,312