Question

On January ,, Biotek purchased a patent for a new product for $36,000. At the time of purchase, the patent was valid for 10 years; however, the patent's useful life was estimated to be only 5 years due to the competitive nature of the product. On December 31, 2018, the product is withdrawn from sale under governmental order because of an electrical hazard caused by the product. The charge against income during 2018 for this patent is:

Answer 1

Step-by-step explanation:

Cost of the asset = 36000

estimated useful life = 5 years

till the date 31 December we will record the amortization for 1 year as follows:

36000/5*1 =7200

or 20% straight line method

36000*20% = 7200

on the Date 31 december 2018 we have

Cost of the Asset =36000

Amortization = -7200

Net book Value = 28800

on the 31 december the product has been withdrawn due to ristrictions imposed by goverment and there will be no future casfflows from the product As per IAS-38 Asset should be recorded at lower of :

A. Value in use and

B. Fair value less cost to sale

There is no fair value and value in use of the asset is Zero

So we have

Carrying Amount = 28800

Value in use = 0

Impairment loss = 28800

the company will charge against income in 2018

Amortization Expense = 7200

Impairment loss = 28800