Question

1. PSI, Inc.’s financial executives have been arguing about the proper way to record the patent they acquired four (4) years ago. The patent was originally purchased for $212,500. At the time of the purchase, PSI’s management believed that the patent would benefit the company for 10 years, after which is would be worthless. Using this information, they have amortized the patent to its current value of $127,500, which is currently shown on the company’s Balance Sheet.After attending a recent conference, the CFO determined that the current market value of the patent is only $115,000, not the full $127,500. Since PSI is having a good year this year, she

2. 3believes it would be agood idea to write down the patent to its current market value. The CEO disagrees. He believes that there is a good chance the patent will earn them at least the carrying value of $127,500 before it becomes obsolete. The CFO’s response was that based on the drop in market value and that there is only a chance that the patent will earn enough to cover the carrying value, it really should be written down to at least market value. The CEO replied that he didn’t care about market value. The value on the books should be based on management’s belief that the asset really will return its carrying value, at least it probably will.QuestionsAnswer allof the following questions:If an impairment is recognized, how much should be impaired?What would the journal entry be to record the impairment?Should PSI record the impairmentthis year?

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Answer 1

solution : As per IAS 36 -"IMPAIRMENT OF ASSETS" impairment means reduction in carrying value{CA} of assets upto its recoverable amount{RA}

so impairmrnt loss = CA -RA

RA is calculated as follows

RA is lower of

1. value in use (entity specific value)

2. fair value - coat to disposal (market specific value)

to check impairment loss at every repaorting period we have to conduct impaiement test at enf of reporting period .

imapirment loss shall be chargeed to Ravaluation Reserve (1st preferance) or Profit and loss account if entity does not have Ravaluation Reserve

solution 1 : as per explaantion above RA is upto lower of value in use or fv less ctd

here given that market value of patent is$ 115,000 so this is the FV less CTD (Market Specific value).

we dont have value in use hence RA = 115,000

so impairment loss = CA - RA

= $127,500 - $115,000

= $12500

solution 2:

journal entry :A) if entity have REvalution Reserve

impairment loss on patent ........$12500

to Revalution Reserve..........................$12500

b) if entity not have Revalution reserve

impairment loss on patent ........$12500

to profit and loss a/c..........................$12500

solution 3 : there are market indicators that market value of patent is redcued so company habe book impairment loss for the year .

(if you have any query related to this just ask me)