Jung Inc. owns a patent for which it paid $72 million. At the end of 2018, it ha
ID: 2534905 • Letter: J
Question
Jung Inc. owns a patent for which it paid $72 million. At the end of 2018, it had accumulated amortization on the patent of $19 million. Due to adverse economic conditions, Jung's management determined that it should assess whether an impairment loss should be recognized for the patent. The estimated undiscounted future cash flows to be provided by the patent total $41 million, and the patent's fair value at that point is $33 million. Under these circumstances, Lester:
a. Would record a $39 million impairment loss on the patent.
b. Would record a $20 million impairment loss on the patent.
c. Would record a $8 million impairment loss on the patent.
d. Would record no impairment loss on the patent.
Explanation / Answer
Answer:
b. Would record a $20 million impairment loss on the patent.
Reason: The patent fails the impairment test, and the impairment is measured by the difference between its fair value of $33 million and its book value of $53 million ($72 million – 19 million).So, there will an impairment loss of $ 53-$ 33=$20.