Patent Item Initial Cost Date Acquired Useful Life at Date Acquired Year Expecte
ID: 2585709 • Letter: P
Question
Patent Item
Initial Cost
Date Acquired
Useful Life at Date Acquired
Year
Expected Future Cash Flows
$
Teal Mountain Industries has the following patents on its December 31, 2016, balance sheet.Patent Item
Initial Cost
Date Acquired
Useful Life at Date Acquired
Patent A $42,636 3/1/13 17 years Patent B $16,080 7/1/14 10 years Patent C $18,720 9/1/15 4 yearsThe following events occurred during the year ended December 31, 2017.
1. Research and development costs of $239,000 were incurred during the year. 2. Patent D was purchased on July 1 for $26,448. This patent has a useful life of 91/2 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, 2017. The controller for Teal Mountain estimates the expected future cash flows from Patent B will be as follows.
Year
Expected Future Cash Flows
2018 $1,800 2019 1,800 2020 1,800The proper discount rate to be used for these flows is 8%. (Assume that the cash flows occur at the end of the year.)
Explanation / Answer
Part 1 : For calculating the carrying value of Patent on December 31, 2016, we need to calculate the total amortization for each Patent from the date of its acquisition to December 31,2016. Patent is amortized using straight line over the useful life of Patent.
Calculation of Carrying value on December 31, 2016 and 2017 (Amount in $)
(2,090)
[(42,636/17)*10/12]
(2,508)
(42,636/17 yrs)
(804)
[(16,080/10 yrs)*6/12]
(1,560)
[(18,720/4 yrs)*4/12]
(1,392)
[(26,448/9.5 yrs)*6/12]
Total Carrying amount of Teal Mountain’ patents on its December 31, 2016, balance sheet.
Total Carrying Amount = $33,022+$12,060+$12,480 = $57,562
Total Carrying amount of Teal Mountain’ patents on its December 31, 2016, balance sheet.
Total carrying amount before impairment of Patent B = $30,514+$10,452+$7,800+$25,056 = $73,822
Impairment of Patent B is calculated by comparing the estimated fair value and carrying value on December 31,2017.
Estimated Fair value on December 31,2017 = Expected future cash flows*PVAF(8%,3 yrs) = $1,800*2.577 = $4,639
Carrying value on December 31,2017 = $10,452
Thus on December 31,2017 the carrying value of Patent B will be written down to its fair value i.e. $4,639.
The carrying value on December 31,2017 after impairment of Patent B = $30,514+$4,639+$7,800+$25,056 = $68,009
Particulars Patent A Patent B Patent C Patent D Initial Cost 42,636 16,080 18,720 26,448 Less: Amortization for year 2013(2,090)
[(42,636/17)*10/12]
- - - Carrying value on December 31, 2013 40,546 - - - Less: Amortization for year 2014(2,508)
(42,636/17 yrs)
(804)
[(16,080/10 yrs)*6/12]
- - Carrying value on December 31, 2014 38,038 15,276 - - Less: Amortization for year 2015 (2,508) (1,608)(1,560)
[(18,720/4 yrs)*4/12]
- Carrying value on December 31, 2015 35,530 13,668 17,160 - Less: Amortization for year 2016 (2,508) (1,608) (4,680) - Carrying value on December 31, 2016 33,022 12,060 12,480 - Less: Amortization for year 2017 (2,508) (1,608) (4,680)(1,392)
[(26,448/9.5 yrs)*6/12]
Carrying value on December 31, 2017 30,514 10,452 7,800 25,056