Question

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Carla Vista Company has a December 31 fiscal year end. Selected information follows for Carla Vista...

Carla Vista Company has a December 31 fiscal year end. Selected information follows for Carla Vista Company for two independent situations as at December 31, 2021:

1. Carla Vista purchased a patent from Tamarisk Inc. for $411,000 on January 1, 2018. The patent expires on January 1, 2026. Carla Vista has been amortizing it over its legal life. During 2021, Carla Vista determined that the patent’s economic benefits would not last longer than six years from the date of acquisition.

2. Carla Vista has a trademark that had been purchased in 2014 for $300,000. During 2020, the company spent $50,000 on a lawsuit that successfully defended the trademark. On December 31, 2021, it was assessed for impairment and the recoverable amount was determined to be $320,000.

a. For each of these assets, determine the amount that will be reported on Carla Vista’s December 31, 2020 and 2021, balance sheets. (Round answers to 0 decimal places, e.g. 5,276.)
b. For each of these assets, determine what, if anything, will be recorded on Carla Vista’s 2021 income statement. Be specific about the account name and the amount. (Round answers to 0 decimal places, e.g. 5,276.)

Expert Solution

Patent :

Legal Life = 8 years

Cost = $411,000

Amortization per year = $411,000 / 8 years = $51,375

Total Accumulated Amortization up to Dec 31, 2020 = $51,375 * 3 = $154,125

Therefore Carrying Value of Patent as at Dec 31, 2020 = $411,000 - $154,125 = $256,875

Revised useful life = 6 years.

Therefore remaining useful life as at Dec 31, 2020 = 3 years.

Revised annual amortization = $256,875 / 3 years = $85,625

Thus total accumulated Amortization up to Dec 31, 2021 = $154,125 + $85,625 = $239,750

Therefore Carrying Value of Patent as at Dec 31, 2021 = $411,000 - $239,750 = $171,250.

Trademark

Cost of Trademark = $300,000

Cost incurred to successfully defend the trademark during 2020= $50,000

Therefore, Carrying Value of Trademark as at Dec 31, 2020 = $300,000 + $50,000 = $350,000

The recoverable amount of trademark as at Dec 31, 2021 = $320,000

Thus impairment expense for the year 2021 = $350,000 - $320,000 = $30,000

Therefore, Carrying Value of Trademark as at Dec 31, 2021 = $350,000 - $30,000 = $320,000

Required a.

Balance Sheet Extract as at Dec 31, 2020
Particulars	Amount	Amount
Intangible Assets
Patents	$ 411,000
Less: Accumulated Amortization	$ 154,125	$ 256,875

Trademark		$ 350,000

Balance Sheet Extract as at Dec 31, 2021
Particulars	Amount	Amount
Intangible Assets
Patents	$ 411,000
Less: Accumulated Amortization	$ 239,750	$ 171,250

Trademark	$ 350,000
Less: Accumulated Impairment	$ 30,000	$ 320,000

Required b.

Income Statement (Extract) for the year ended Dec 31, 2020
Particulars	Amount
Expenses
Amortization Expenses	$51,375

Income Statement (Extract) for the year ended Dec 31, 2021
Particulars	Amount
Expenses
Amortization Expenses	$85,625
Impairment Expenses	$30,000

Feel free to ask for any clarification, if required. Kindly provide feedback by thumbs up. It would be highly appreciated. Thank You.

ekkarill92 answered 2 years ago

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