Final answer:
Truffle Inc. will report an impairment loss of $2,560,000 on their 2017 income statement, which is the difference between the patent's carrying amount and the recoverable amount calculated from its expected future cash flows.
Step-by-step explanation:
The question asks to identify the impairment loss that Truffle Inc. should report on their income statement for the fiscal year of 2017.
First, we need to determine the carrying amount of the patent. Since the patent was acquired for $7,800,000 with a 10-year life and it's being amortized using the straight-line method, the annual amortization expense is $780,000 ($7,800,000/10 years). By the end of 2017, which is four years into the patent's lifespan, total cumulative amortization would be $3,120,000 ($780,000 times 4 years). The carrying amount of the patent is therefore $4,680,000 ($7,800,000 original cost - $3,120,000 accumulated amortization).
The next step is to compare this carrying amount with the recoverable amount, which is the greater of the patent's fair value less costs to sell (not provided in the question) and its value in use. The question gives us the value in use, which is the present value of the expected future cash flows from the patent, and that is $2,120,000.
Since the recoverable amount ($2,120,000) is less than the carrying amount ($4,680,000), an impairment loss is necessary. The amount of the impairment loss is the difference between the carrying amount and the recoverable amount, which is $2,560,000 ($4,680,000 - $2,120,000). Truffle Inc. would report this as an impairment loss on their 2017 income statement.