Purpose: This exercise will illustrate the accounting for impairment of an intangible asset with a limited-life.
The following information relates to a patent owned by Pulido Company:
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Cost
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$4,300,000
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Carrying amount
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2,100,000
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Expected future net cash flow
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1,900,000
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Fair value
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1,500,000
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Instructions
(a) Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2013, assuming Pulido will continue to use the asset in the future.
(b) Using the same assumption as part (a) above, prepare the journal entry to record amortization expense for 2014 assuming the asset has a remaining useful life of 4 years at the beginning of 2014.
(c) Using the same assumption as part (a) above, prepare the journal entry (if any) at December 31, 2014, assuming the fair value of the asset has increased to $2,400,000.
(d) Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2013, assuming Pulido ceased using the patent at the end of 2013 and intends to dispose of the patent in the coming year. Pulido expects to incur a $12,000 cost of disposal.
(e) Using the same assumption as part (d) above, prepare the journal entry at December 31, 2014 for amortization for 2014, assuming the asset has not been sold at that time.
(f) Using the same assumption as part (d) above, prepare the journal entry at December 31, 2014 assuming the asset has not been sold at that time and the fair value of the asset has increased to $2,400,000.
(g) Indicate the income statement classification of the account, Loss on Impairment.