Question

Windsor 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		$42,840		3/1/16		17 years
Patent B		$16,200		7/1/17		10 years
Patent C		$19,200		9/1/18		4 years

The following events occurred during the year ended December 31, 2020.

1.		Research and development costs of $240,000 were incurred during the year.
2.		Patent D was purchased on July 1 for $47,652. This patent has a useful life of 91/2 years.
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 Windsor 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.)

Compute the total carrying amount of Windsor’ patents on its December 31, 2019, balance sheet.

Total carrying amount

$

  

  

Compute the total carrying amount of Windsor' patents on its December 31, 2020, balance sheet.

Total carrying amount

$

Answer 1

Windsor Industries Requirement a 210 Patent A Life in years 17 Life in months (12 x 17) 204 Amortization per month ($42,840 = 204). Number of months amortized to date Year Month 2016 10 2017 12 2018 12 2019 Book Value 12/31/19: $33,180 ($42,840 - [46 x $210]) 135 Patent B Life in years 10 Life in months (12 x 10) 120 Amortization per month ($16,200 = 120). Number of months amortized to date Year Month 2017 2018 12 2019 6 12 Book Value 12/31/19: $12,150 ($16,200 - [30 x $135]) 4 400 Patent C Life in years Life in months (12 x 4) 48 Amortization per month ($19,200 = 48). Number of months amortized to date Year Month 2018 4 2019 12 16 Book Value 12/31/19: $12,800 ($19,200-(16 x $400]) At December 31, 2019 Patent A 33180 Patent B 12150 Patent C 12800 58130

Requirement B Analysis of 2020 transactions 1. The $240,000 incurred for research and development should be expenses. 2. The book value of Patent B is $12,150 and its estimated future cash flows are $5,550 (3 X $1,850); therefore Patent B is impaired. The impairment loss is imputed as follows Book Value 12150 Less: Present value of future cash flows ($1,850 x 2.57710) 4768 Loss recognized 7382 Patent B carrying amount (12/31/20) $4,768 At December 31, 2020 Patent A 30660 ($33,180 - (12 x $210]) Patent B 4768 (Present value of future cash flows) Patent C 8000 ($12,800 - [12 x $400]) Patent D 45144 ($47652 - $2,508) Total 88572 Patent D amortization Life in years 9.5 Years Life in months Amortization per months ($47,652 - 114) 418 $418 x 6 = $2,508