following information is available for Barkdey Company\'s patents as of the bala
ID: 2431502 • Letter: F
Question
following information is available for Barkdey Company's patents as of the balance sheet reportin 31, 2017: Cost of Patent Accumulated Amortization Expected future net cash flows 1,800,000 200,000 Each year for the next 8 years The appropriate discount rate is 6% a) What is the purpose behind this problem? What are the GAAP recognition rules, theory or b) Calculate (measure) the impairment loss, If any, based on the information above. c) Prepare the journal entry to record the impairment loss, if necessary, How does this look on the accounting equation and in T-Account form? Stockholders Equity alance sheet Assets s Balance Sheet Liabilities + Long Current Long term Assets Current+ Liabilities Long-termCapital Liabilities Retained Earnings Other ssetsExplanation / Answer
a)
The purpose is to determine if the asset is impaired or not.
If undiscounted future cash inflows are less than the carring value of the asset, impairment loss is to be recognised.
GAAP uses 2 step process-
1st Determining
2nd Measuring
the impairment.
In 1st step, Fair value of the asset is compared with its carring value.
In 2nd step, the impairment loss is calculated by subtracting asset's fair value from its book value.
b)
Future net cash flow = $200,000
6% PVAF, 8 years = 6.2098 (approx)
Fair Value = $1,241,960 (approx)
Carring Amount = $3,440,000 - $1,800,000 = $1,640,000
Impairment loss = $1,640,000 - $1,241,960 = $398,040 (Ans)
c)
Journal Entry of Impairment loss
Loss on Impairment Dr. $398,040
Patent Cr. $398,040
Retained Earnings Dr. $398,040
Loss on Impairment Cr. $398,040
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