Question

Mayflower Printers incurred external costs of $600,000 for a patent for a new laser printer. Although the patent gives legal protection for 20 years, it was expected to provide Mayflower with a compettive advantage for only fifteen years due to expected technological advances in the industry, Mayflower uses the straight-line method of amortization. (Click the icon to view additional information.) Read the reguirements. Requirement 1. Make joumal entries to record (a) the purchase of the patent and (b) amortization for year 1. (Record debits first, then credits. Exclude dxplanations from any journal entries.) Slart by recording (a) the purchase of the patent. Read the requirements. More info Requiren Ford debits first, then credits. any joum Start by r After using the patent for ten years, Mayflower learned at an industry trade show that Stanley Printers has patented a more efficient printer and will be selling this printer next quarter. Because of this new information, Mayflower determined that the expected future cash flows from its patent were now only $120,000. The fair value of Mayflower's patent on the open market was now zero. Requirements irement 1. bits first, then credits, 1 1. Make journal entries to record (a) the purchase of the patent and (b) amortization for year 1. 2. Once Mayflower learned of the competing printer and adjusted the expected future cash flows from its original patent, was this asset impaired? If so, make the impairment adjusting entry.

Answer 1

To record the purchase of the patent, debit Intangible Assets - Patent and credit Cash or Accounts Payable for $600,000. In year 1, debit Amortization Expense and credit Accumulated Amortization - Patent for $40,000. If the patent is impaired, debit Impairment Loss for $480,000 and credit Intangible Assets - Patent for the same amount.

Step-by-step explanation:

When recording the purchase of the patent, the journal entry would be a debit to the Intangible Assets - Patent account for $600,000 and a credit to Cash or Accounts Payable for $600,000. For the amortization in year 1, you would debit the Amortization Expense account and credit the Accumulated Amortization - Patent account for $40,000, which is the result of the $600,000 cost divided by the 15-year useful life.

If the patent is impaired, an adjusting entry is needed to write down its carrying amount to the recoverable amount, which is the higher of future cash flows and fair value. Because the future cash flows expected are now $120,000 and the fair value is zero, the asset is impaired. The adjusting entry would involve a debit to an Impairment Loss account for $480,000 (the carrying amount of $600,000 less expected future cash flows of $120,000) and a credit to the Intangible Assets - Patent account for $480,000.