Question

SAS Computers owns a patent on a computer processor. The processor was developed and capitalized at a cost of €2,100,000 in the beginning of 2015. It was expected to be economically useful for 7 years and have no residual value. At the beginning of 2018, a new processor was developed, making the old processor worth €900,000 (independent appraiser) with €200,000 total cost to sell. The present value of the processor’s future cash flows, given the development of the newer processor, is estimated to be €870,000. At this point, it is expected to have a useful life of 4 years with no residual value. Is the processor impaired in 2018? If it is impaired, prepare the to record the loss. Also prepare the journal entry for amortization in 2018. Show your work.

Answer 1

Impairment loss is the amount by which the assets carrying value is in excess of recoverable amount

Carrying Amount is the amount at which the assets are reported in the balance sheet after deducting depreciation and impairment loss if any

Recoverable amount is higher of the assets fair value less cost to sale those assets and its value in use.Value in use means the present value of the future cash flow generated from the asset.

Impairment test is done when there is an indication of the asset may be have impaired except in case of goodwill and intangible assets with indefinite useful live which is to be done annually.