On January 2, Year 1, Lava, Inc. purchased a patent for a new consumer product for $90,000. At the time of purchase, the patent was valid for 15 years; however, the patent's useful life was estimated to be only 10 years due to the competitive nature of the product. On December 31, Year 4, the product was permanently withdrawn from sale under governmental order because of a potential health hazard in the product. What amount should Lava charge against income during Year 4, assuming amortization is recorded at the end of each year?
a. $54,000
b. $63,000
c. $9,000
d. $72,000
Explanation
Choice “b” is correct. The patent has been permanently impaired and a loss equal to its carrying amount should be recorded. The charge against income is:
Patent cost $ 90,000
Pre-Year 4 amortization ($90,000/10) x 3 (27,000)
Total, 1-1-Year 4 $ 63,000
The $63,000 would be amortized for another year (Year 4) or $9,000 expense and the balance of $54,000 written off. The total charge to income is $63,000 in Year 4.
Choice “c” is incorrect. The addition to the $9,000 amortization, a loss for permanent impairment should be recorded.
Choice “a” is incorrect. In addition to the $54,000 impairment loss, $9,000 of patent amortization would also be charged against income in Year 4.
Choice “d” is incorrect. Amortization for 3 years should have been recorded, in addition to Year 4.
I'm confused why the answer isn't A. Can someone explain? Thanks
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