Question

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             $44,880               3/1/13                              17 years

Patent B             $17,400               7/1/14                              10 years

Patent C             $24,000               9/1/15                                4 years

The following events occurred during the year ended December 31, 2017.

1. Research and development costs of $250,000 were incurred during the year.

2. Patent D was purchased on July 1 for $46,284. 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                                      $1,900

2019                                      $1,900

2020                                      $1,900

The proper discount rate to be used for these flows is 8%. (Assume that the cash flows occur at the end of the year.)

Compute the total carrying amount of Teal Mountain’ patents on its December 31, 2016, balance sheet. (Round answer to 0 decimal places, e.g. 8,564.) Total carrying amount $ Compute the total carrying amount of Teal Mountain' patents on its December 31, 2017, balance sheet. (Round answer to 0 decimal places, e.g. 8,564.) Total carrying amount $

Answer 1

Total carrying amount of Teal Mountain’ patents on its December 31, 2016, balance sheet:

Patent

Carriying Amount ($)

Patent A

(Note:1)

34760

Patent B

(Note:2)

13050

Patent C

(Note:3)

16000

Total

63810

Note:1

Patent A

Initial cost =$ 44880

Useful life=17 years=17*12=204 months

Amortization per month=Initial cost/Useful life=44880/204=$ 220 per month

Acquired on 3/1/13

Months from acquisition till Dec 31, 2016=46 months

Amortization till Dec 2016=220*46=$ 10120

Carriying amount=Initial cost-Amortization till Dec 2016=44880-10120=$ 34760

Note:2

Patent B

Initial cost =$ 17400

Useful life=10 years=10*12=120 months

Amortization per month=Initial cost/Useful life=17400/120=$ 145 per month

Acquired on 7/1/14

Months from acquisition till Dec 31, 2016=30 months

Amortization till Dec 2016=30*145=$ 4350

Carriying amount=Initial cost-Amortization till Dec 2016=17400-4350=$ 13050

Note:3

Patent C

Initial cost =$ 24000

Useful life=4 years=4*12=48 months

Amortization per month=Initial cost/Useful life=24000/48=$ 500 per month

Acquired on 9/1/15

Months from acquisition till Dec 31, 2016=16 months

Amortization till Dec 2016=16*500=$ 8000

Carriying amount=Initial cost-Amortization till Dec 2016=24000-8000=$ 16000

Total carrying amount of Teal Mountain' patents on its December 31, 2017, balance sheet:

Patent

Carriying Amount ($)

Patent A

Note:4

32120

Patent B

Note:5

4896

Patent C

Note:6

10000

Patent D

Note:7

43848

Total

90864

Research and development cost should be expensed and should not be capitalized as intangible asset

Note:4

Patent A

Amortization per month=$ 220 per month

Amortization for 2017=220*12=$ 2640

Carriying amount=Carriying amount for previous year-Amortization for 2017=34760-2640=$ 32120

Note:5

Patent B

Amortization per month=$ 145 per month

Amortization for 2017=145*12=$ 1740

Carriying amount=Carriying amount for previous year-Amortization for 2017=13050-1740=$ 11310

Present value of future cashflows=Expected future cashflow*Present value factor at 8% for 3 years=1900*2.577=$ 4896

Impairment loss=Carriying amount-Present value of future cash flows=11310-4896=$ 6414

New carriying amount=Present value of future cashflows=$ 4896

Note:6

Patent C

Amortization per month=Initial cost/Useful life=24000/48=$ 500 per month

Amortization for 2017=500*12=$ 6000

Carriying amount=Carriying amount for previous year-Amortization for 2017=16000-6000=$ 10000

Note:7

Patent D

Initial cost =$ 46284

Useful life=9.5 years=9.5*12=114 months

Amortization per month=Initial cost/Useful life=46284/114=$ 406 per month

Acquired on 7/1/17

Months from acquisition till Dec 31, 2017=6 months

Amortization till Dec 2017=6*406=$ 2436

Carriying amount=Initial cost-Amortization till Dec 2017=46284-2436=$ 43848