Question

Sunland Company acquired a patent on an oil extraction technique on January 1, 2017 for $7200000....

Sunland Company acquired a patent on an oil extraction technique on January 1, 2017 for $7200000. It was expected to have a 10 year life and no residual value. Sunland uses straight-line amortization for patents. On December 31, 2018, the future cash flows expected from the patent were $810000 per year for the next 8 years. The present value of these cash flows, discounted at Sunland’s market interest rate, is $4050000. At what amount should the patent be carried on the December 31, 2018 balance sheet?

A) $5760000.
B) $6480000.
C) $7200000.
D) $4050000.
Business   Accounting   
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Answer #1
Cost of Patent 7200000
Less: Amortization for 2 years 1440000 =7200000*2/10
Book value of Patent on December 31, 2018 5760000
Expected future cash flows for remaining years 6480000 =810000*8
As the future cash flows expected are greater than book value of Patents, no impairment exists.
Patent should be carried on the December 31, 2018 balance sheet at it's book value
Patent should be carried on the December 31, 2018 balance sheet at $5760000
Option A $5760000 is correct
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