Question

Crane Company acquired a patent on an oil extraction technique on January 1, 2020 for $6900000. It was expected to have a 10 year life and no residual value. Crane uses straight-line amortization for patents. On December 31, 2021, the future cash flows expected from the patent were $720000 per year for the next eight years. The present value of these cash flows, discounted at Crane’s market interest rate, is $3900000. At what amount should the patent be carried on the December 31, 2021 balance sheet?

Answer 1

$5,520,000

Step-by-step explanation:

As per the data given in the question,

Cost = $6,900,000

Less: Amortization for 2 years = $1,380,000 ($6,900,000×2÷10)

Book value of patent = $5,520,000 ($6,900,000 - $1,380,000)

Undiscounted sum of future cash flows = $5,760,000 ($720,000×8)

Since the amount of book value is less than the amount of undiscounted sum of future cash flow, Therefore Patent should be carried on the Book value, So, Patent should be carried on the December 31,2021 balance sheet at $5,520,000