Question

In early January 2019, Oriole Corporation applied for a patent, incurring legal costs of $91,000. In January 2020, Oriole incurred $22,320 of legal fees in a successful defense of its patent.

Compute 2019 amortization, 12/31/19 carrying amount, 2020 amortization, and 12/31/20 carrying amount if the company amortizes the patent over 10 years.

2019 amortization		$
12/31/19 carrying value		$
2020 amortization		$
12/31/20 carrying value		$

  

  

Compute the 2021 amortization and the 12/31/21 carrying amount, assuming that at the beginning of 2021, based on new market research, Oriole determines that the fair value of the patent is $95,760. Estimated future cash flows from the patent are $99,960 on January 3, 2021.

2021 amortization		$
12/31/21 carrying value		$

  

Answer 1

1.

2019 amortization: $91,000 ÷ 10 = $9,100.

12/31/19 book value: $91,000 – $9,100 = $81,900.

2020 amortization: ($81,900 + $22,320) ÷ 9 = $11,580.

12/31/20 book value: ($81,900 + $22,320 – $11,580) = $92,640.

2.

Carrying amount ($92,640) > future cash flows ($99,960); thus the trade name fails the recoverability test. The new carrying value is $95,760—the trade name’s fair value.

2021 amortization (after recording impairment loss): $95,760 ÷ 8 = $11,970.

12/31/21 book value: $95,760 – $11,970 = $83,790.