Mining Company acquired a patent on an oil extraction technique on January 1, ye
ID: 2422788 • Letter: M
Question
Mining Company acquired a patent on an oil extraction technique on January 1, year 1 for $48,554. It was expected to have a 19 year life and no residual value. Mining uses straight-line amortization for patents. On December 31, year 7, the expected future cash flows expected from the patent were expected to be $35,059 . The present value of these cash flows, discounted at Mining’s market interest rate, is $20,842. At what amount should the patent be carried on the December 31, year 7 balance sheet?
Explanation / Answer
AMORTIZATION OF THE PATENT PER YEAR ($48554 / 19) = $2555.47
---------------------------------------------------------------------------------------------------------------------
PURCHASE PRICE OF THE PATENT = $48554
LES AMORTIZATION FOR 7 YEARS ($2555.47 * 7) = ($17888.29)
BOOK VALUE OF THE PATENT AT END OF 7 YEAR= $30665.71
-------------------------------------------------------------------------------------------------------------------------------------
PRESENT VALUE OF FUTURE CASHFLOW OF THE PATENT = $20842
LESS BOOK VALUE OF THE PATENT AT END OF 7 YEAR = ($30665.71)
IMPAIREMENT LOSS OF THE PATENT = ($9823.71)
-------------------------------------------------------------------------------------------------------------------------------------------------
AS THE PRESENT VALUE OF FUTURE CASH FLOW OF THE PATENT IS LESS THAN THE BOOK VALUE THE PATENT SHOULD BE RECORDED AT $20842 VALUE AND THE IMPAIRMENT LOSS SHOULD BE RECORDED IN THE INCOME STATEMENT OF THE 7TH YEAR.