Question: Recording the Purchase, Amortization, and Impairment of a Patent Nutek, Inc., holds a patent for the Full Service handi-plate, which the company described in its annual report as "a patented plastic buffet plate that allows the user to hold both a plate and cup in one hand" and that "has a multitude of uses including social gatherings such as backyard barbecues, buffets, picnics, tailgate and parties of any kind." (No, we are not making this up.) Nutek also purchased a patent for $1,000,000 for "a specialty line of patented switch plate covers and outlet plate covers specifically designed to light up automatically when the power fails." Assume the switch plate patent was purchased January 1, 2009, and it is being amortized over a period of 10 years. Assume Nutek does not use an Accumulated Amortization account but instead charges amortization directly against the intangible asset account. Required:
1. Describe the effects of the purchase and amortization of the switch plate patent on the 2009 balance sheet and income statement.
2. Give the journal entries to record the purchase and amortization of the switch plate patent in 2009.
3. After many months of unsuccessful attempts to manufacture the switch plate covers, Nutek determined the patent was significantly impaired and its book value on January 1, 2010, was written off. Show the journal entry and the accounting effects of recording the asset impairment.