Question

Marin 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		$45,696		3/1/16		17 years
Patent B		$17,880		7/1/17		10 years
Patent C		$25,920		9/1/18		4 years

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

1.		Research and development costs of $254,000 were incurred during the year.
2.		Patent D was purchased on July 1 for $29,184. 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 Marin estimates the expected future cash flows from Patent B will be as follows.

Year		Expected Future Cash Flows
2021		$2,100
2022		2,100
2023		2,100

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 Marin’ patents on its December 31, 2019, balance sheet.

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

Answer 1

TOTAL CARRYING AMOUNT OF PATENTS (31.12.2019)

PARTICULAR	INITIAL COST	AMORTIZED AMOUNT	NET VALUE
PATENT A	45,696	10,752	34,944
PATENT B	17,880	5,364	12,516
PATENT C	25,920	12,960	12,960
		TOTAL	60,420

TOTAL CARRYING AMOUNT OF PATENTS (31.12.2020)

PARTICULAR	INITIAL COST	AMORTIZED AMOUNT	NET VALUE
PATENT A	45,696	13,440	32,256
PATENT B	17,880	(solved separately)	5411.70
PATENT C	25,920	19,440	6,480
PATENT D	29,184	1,536	27,648
		TOTAL	71,796

The PRESENT VALUE of expected cash flows of PATENT B:

YEAR	CASH FLOWS	PRESENT VALUE FACTOR (@8%)	PRODUCT
2021	2100	0.926	1,944.60
2022	2100	0.857	1799.70
2023	2100	0.794	1667.40
	6300	2.577	5411.70

Thus, the net present value (NPV) of PATENT B = $ 5411.70.