Corning Industries owns a patent for which it paid $77,000. At the end of the cu
ID: 2529148 • Letter: C
Question
Corning Industries owns a patent for which it paid $77,000. At the end of the current year, accumulated amortization on the patent totaled $14,000. Due to adverse economic conditions, Corning’s management determined that it should assess whether an impairment loss should be recognized for the patent. The estimated undiscounted future cash flows to be provided by the patent total $45,000, and the patent's fair value is $30,000. (a) What is the amount of the impairment loss, if any, on the patent at the end of the current year? (b) What is the book value of the patent after any impairment loss is recorded?
Explanation / Answer
Recognition of Impairment Loss:
If the carrying amount exceeds the recoverable amount, an impairment expense amounting to the difference is recognized in the period. If the carrying amount is less than the recoverable amount no impairment is recognized.
Definitions:
Carrying amount means the amount shown in the accounting records. i.e Cost of patent - accumulated depreciation till date.
Recoverable amount means higher of
1) Fair Value - Cost to sell or
2) Value in use.
Fair value less costs to sell is the current market value further deducted by the selling costs such as as commission, registration, etc.
Value in use is future net cash flows expected to be derived from the continuing use of the asset.
Indicator of impairement:
In this case adverse economic conditions i .e external indicator.
Calculation:
Carrying amount = $77,000-$14,000=$63,000 (a)
Recoverable amount=
Fair Value = $30,000 (I)
Value in use = $45,000 (II)
Higher of (I) and (II) is Value in use
Hence, recoverable amount is $45,000 (b)
On comparison of (a) & (b), it is found that carrying amount is higher than recoverable amount.
Therefore, there is impairment loss of $63,000-$45,000=$18,000
Book value of the patent after recording the impairement loss is $63,000-$18,000=$45,000 i.e at recoverable amount.
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