In early January 2013, Lerner Corporation applied for a patent, incurring legal
ID: 2478645 • Letter: I
Question
In early January 2013, Lerner Corporation applied for a patent, incurring legal costs of $60,000. In January 2014, Lerner incurred $9,000 of legal fees in a successful defense of its patent. Compute 2013 amortization, 12/31/13 carrying value, 2014 amortization, and 12/31/14 carrying value if the company amortizes the patent over 10 years. Compute the 2015 amortization and the 12/31/15 carrying value, assuming that at the beginning of 2015, based on new market research, Lerner determines that the fair value of the patent is $44,000. Estimated future cash flows from the patent are $49,000 on January 3, 2015. Include impairment loss, if any.Explanation / Answer
(a) 2013 amortization: $60,000 /10 yrs. = $6,000
12/31/2013 carrying value: $60,000 - $6,000 = $54,000
2014 amortization: ($54,000 + $9,000) /9 yrs. = $7,000
12/31/14 carrying value: ($54,000 + $9,000) - $7,000 = $56,000
(b) Since the expected future cash flows ($45,000) are less than the carrying value ($56,000), an impairment loss must be computed. Loss on impairment: $56,000 carrying value - $44,000 fair value = $12,000
2015 amortization: $44,000 8 yrs. = $5,500
12/31/15 carrying value: $44,000 - $5,500 = $38,500
Goodwill is recorded only when it is acquired through a business combination. Goodwill acquired in a business combination is considered to have an indefinite life and therefore should not be amortized, but should be tested for impairment on at least an annual basis. Intangible Assets of Company is considering the write-off of a limited life intangible asset because of its lack of profitability.
Accounting standards require that if events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable, then the carrying amount of the asset should be assessed. The assessment or review takes the form of a recoverability test that compares the sum of the expected future cash flows from the asset (undiscounted) to the carrying amount. If the cash flows are less than the carrying amount, the asset has been impaired. The impairment loss is measured as the amount by which the carrying amount exceeds the fair value of the asset. The fair value of assets is measured by their market value if an active market for them exists. If no market price is available, the present value of the expected future net cash flows from the asset may be used.