Question

Once Miracle 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. ​(Record debits​ first, then credits. Exclude explanations from any journal entries. For transactions that do not require an​ entry, make sure to select​ "No entry​ required" in the first cell in the​ "Accounts" column and leave all other cells​ blank.)

Answer 1

(a) Entry for purchase of patent :

Patent a/c debit $600,000.

To Cash / Bank A/c. $600,000.

(b) Amortisation : (legal protection for 20 years) >> 600,000/20 = 30,000 per annum

Amortisation expenses -Patents $30,000

To Patents account $30,000

(c) Impairment Loss on Patents ac. debit 270,000 (see calculations below)

To Patents account 270,000

(Value of patents at end of 4 years = 600000-120000=480,000)

Expected future value = 210,000

Impairment = 480,000-210,000=270,000