Question

Sage Hill Industries has the following patents on its December 31, 2019, balance sheet. Patent Initial Date Useful Life at Date Item Cost Acquired Acquired Patent A $43,860 3/1/16 17 years Patent B $16,800 7/1/17 10 years Patent $21,600 9/1/18 4 years The following events occurred during the year ended December 31, 2020. 1. Research and development costs of $245,000 were incurred during the year. 2. Patent was purchased on July 1 for $40,470. This patent has a useful life of 9/2 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 Sage Hill estimates the expected future cash flows from Patent 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.)

Answer 1

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Total carrying amount at end of year 2020 is $84,142

A B C D E F G 1 2 Patent A Patent B Patent C 43860 16800 21600 3 4 46 30 16 5 5 Total carrying amount at end of year 2019 Patent Cost (A) Month upto 31st Dec 2019 Total months (B) till 2019 Life in months © Amortization per month (A/C) =D Total Amortization upto Dec 31 2019 (D*B)=E Carrying amount as on Dec 31, 2019 (A-E) = F Total carrying amount at end of year 2019 204 120 48 7 215 140 450 8 9890 4200 7200 33970 12600 9 10 14400 60970 11 12 Amount 13 10920 Calculation of impairment on Patent B Carrying amount of patent B Present value of future cash flow @8% Loss to be recognized 14 5412 15 5508 16 17 Patent A Patent B Patent C Patent D 18 33970 12600 14400 5400 40470 2130 19 2580 1680 Total carrying amount at end of year 2020 Opening carrying amount Amortization for the year Impairment on Patent B Closing carrying amount Total carrying amount at end of 20 5508 5412 21 31390 9000 38340 22 year 2020 84142 23

For calculation ref:

A B C D E F 1 2 Patent B Patent 21600 3 16800 4 5 6 Total carrying amount at end of year 2019 Patent A Patent Cost (A) 43860 Month upto 31st Dec 2019 Total months (B) till 2019 =10+12+12+12 Life in months 1=17*12 Amortization per month (A/C) =D =C3/C6 Total Amortization upto Dec 31 2019 (D*B)= E =c5*C7 Carrying amount as on Dec 31, 2019 (A-E) =F Total carrying amount at end of year 2019 =6+12+12 =10*12 =D3/D6 =D5%D7 =D3-D8 =4+12 1=12*4 =E3/E6 =E5 E7 7 00 9 =C3-C8 =E3-E8 10 =SUM(C9:19) 11 12 13 Calculation of impairment on Patent B Carrying amount of patent B Present value of future cash flow @8% Loss to be recognized Amount =D18-D19 =PV(8%,3,-2100) =C13-C14 14 15 16 17 Patent A Patent B Patent C Patent D 18 =C9 40470 =F18*0.5/9.5 19 =C7*12 Total carrying amount at end of year 2020 Opening carrying amount Amortization for the year Impairment on Patent B Closing carrying amount Total carrying amount at end of year 2020 =D9 =E9 =D7*12 =E7*12 =C15 =D18-D19-D20 =E18-E19 20 21 =C18-C19 =F18-F19 =SUM(C21:F21) 22 23