Question

1. Fehr Co. purchased a patent from Wells Co. for $180,000 on July 1, 2006. Expenditures of $51,000 for successful litigation in defense of the patent were paid on July 1, 2009. Fehr estimates that the useful life of the patent will be 20 years from the date of acquisition.

Required:

What is the carrying value of the patent at December 31, 2009?

     

2. Presented below is information related to copyrights owned by Wamser Corporation at December 31, 2010.

                        Cost                                                     $2,700,000

                        Carrying amount                                   2,400,000

                        Expected future net cash flows             2,100,000

                        Fair value                                              1,400,000

Assume Wamser will continue to use this asset in the future. As of December 31, 2010, the copyrights have a remaining useful life of 5 years.

Required:

Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2010.

Answer 1

Answer-a:

$ 180,000 Cost of patent Amortization expenseJuly 01, 2006 to July 01, 2009 [($180,000/20) > 3 years] Carrying value as at July 01, 2009 Cost incurred for successful litigation in defense Total Carrying value Amortization July 01, 2009 to December 31, 2009 [$204,000 x 1/(20-3) 1/2] Carrying value as at December 31, 2009 27000 153000 51000 204000 6000 $ 198,000

Answer-b:

Carrying amount Less: Fair value Impairement loss $ $ $ 2,400,000 1,400,000 1,000,000

Date Credit ($) Account Name Loss on impairement Copyrights Debit ($) 1,000,000 Dec.31, 2010 1,000,000