Question

Jones Company acquired a patent on an oil extraction technique on January 1, 2020 for $7,500,000....

Jones Company acquired a patent on an oil extraction technique on January 1, 2020 for $7,500,000. It was expected to have a 10 year life and no residual value. Chi uses straight-line amortization for patents. On December 31, 2021, the future cash flows expected from the patent were $700,000 per year for the next eight years. The present value of these cash flows, discounted at Chi’s market interest rate, is $4,200,000 (present value of cash flows, or fair market value of the patent is $4,200,000).


  1. Calculate the total (undiscounted) future cash flows expected from the patent, as of December 31, 2020?
  2. Conduct the Recoverability test to conclude whether the impairment of the patent has occurred
  3. At what amount should the patent be carried on the December 31, 2021 balance sheet?

Please show work

Homework Answers

Answer #1

Impairment loss of an Intangible asset with finite life is recognized when the Book value of the asset is greater than future cash flows from the asset.

Book Value as on December 31st 2021 = Cost - Depreciation for 2020 & 2021

= $ 7,500,000 - ( $ 7,500,000 / 10 * 2)

= $ 6,000,000

Future Cash flows from the asset as on December 31st 2021 = $ 700,000 * 8

= $ 5,600,000

Since the Book Value is greater than Future cash flows from the asset, Loss on impairment exists.

Impairment loss = Book value as on December 31st 2021 - Market value as on December 31st 2021

= $ 6,000,000 - $ 4,200,000

= $ 1,800,000

Value of patent to be carried on December 31, 2021 = $ 4,200,000

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