Question

The following data relates to a patent owned by Sophia Cosmetology Group: Cost $2,400,000 Carrying amount 1,700,000 Expected future net cash flow 1,500,000 Fair value 1,400,000)

(a) Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2016.

(b) Using the same assumption as part (a) above, prepare the journal entry to record amortization expense for 2017 assuming the asset has a remaining useful life of 3 years at the beginning of 2017.

(c) Using the same assumption as part (a) above, prepare the journal entry (if any) at December 31, 2017, assuming the fair value of the asset has increased to $1,900,000.

(d) Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2016, assuming Sophia ceased using the patent at the end of 2016 and intends to dispose of the patent in the coming year. Sophia expects to incur a $10,000 cost of disposal.

Answer 1

Requirement a:-

The journal entry to record the impairment of asset at December 31, 2016

	Particulars	Amount	Amount
a.)	Loss on Impairment A/c Dr.($1,700,000 - $1,400,000)	300,000
	To Patents A/c		300,000
	(To record the impairment loss on patent)

The estimated future cash flows of the asset is less than the asset's carrying value which implies an impairment has occured. The impairment of the asset is calculated as Carrying value of the asset - Fair Value of the asset; $1,700,000 - $1,400,000 = $300,000

Requirement b:-

The journal entry to record amortization expense for 2017 assuming the asset has a remaining useful life of 3 years at the beginning of 2017.

	Particulars	Amount	Amount
b.)	Amortization expense ($1,400,000/3 years)	466,667
	To Patents A/c		466,667
	(To record the amortization expenses on patents)

Requirement c:-

The journal entry to record amortization expense for 2017 assuming the asset has a remaining useful life of 3 years at the beginning of 2017.

There would not be any journal entry recorded to increase the fair value of the patent. Generally, recovery of previously recognized impairment losses are not allowed in subsequent periods.

Requirement d:-

	Particulars	Amount	Amount
d.)	Loss on Impairment($1,700,000 - $1,400,000 - $10,000)	290,000
	To Patents A/c		290,000
	(To record the impairment loss)

Recoverability test:- The estimated future cash flows of the asset less cost to sell is less than the carrying value of the asset. Hence, recoverability test concludes an impairment as occured.

Impairment loss:- The impairment loss is calculated by reducing the fair value as of 2016 from the carrying value of the patent. Also, we would deduct the estimated costs to dispose the patent to record the actual impairment loss. Hence, Impairment loss = $1,700,000 - $1,400,000 - $10,000 = $290,000