Question

Larkspur Industries has the following patents on its December 31, 2019, balance sheet.

Patent Item		Initial Cost		Date Acquired		Useful Life at Date Acquired
Patent A		$45,492		3/1/16		17 years
Patent B		$17,760		7/1/17		10 years
Patent C		$25,440		9/1/18		4 years

The following events occurred during the year ended December 31, 2020.

1.		Research and development costs of $253,000 were incurred during the year.
2.		Patent D was purchased on July 1 for $43,092. This patent has a useful life of 91/2 years.
3.		As a result of reduced demands for certain products protected by Patent B, a possible impairment of Patent B’s value may have occurred at December 31, 2020. The controller for Larkspur estimates the expected future cash flows from Patent B will be as follows.

Year		Expected Future Cash Flows
2021		$2,050
2022		2,050
2023		2,050

The proper discount rate to be used for these flows is 8%. (Assume that the cash flows occur at the end of the year.)

(A)  Compute the total carrying amount of Larkspur’ patents on its December 31, 2019, balance sheet.

Total carrying amount

???? $

(B) Compute the total carrying amount of Larkspur' patents on its December 31, 2020, balance sheet.

Total carrying amount

????????????? $

Answer 1

Solution: Useful Life at Date Date Acquired Acquired Patent Item Initial Cost carrying vaue number of monhs amortisation as at Dec Useful Life in months till Dec 31,2019 till Dec 31, 2019 31, 2019 d=c*12 e=Dec 31, 2019 -b f=a*e/d ga-f 204 10,258 35,234 120 4,440 13,320 48 8,480 16,960 Total 65,514 Patent A Patent B Patent C 45,492 17,760 25,440 03/01/2016 17 years 07/01/2017 10 years 09/01/2018 4 years

Part b: Useful Life at Date Date Acquired Acquired Patent Item Initial Cost g=a-f Patent A Patent B* Patent C Patent D 45,492 17,7601 | 25,440 43,092 carrying vaue as at Dec number of monhs amortisation 31,2020 before carrying vaue as at Dec Useful Life in months till Dec 31,2020 till Dec 31, 2020 impairment Impairment* 31, 2020 after impairment d=c*12 e=Dec 31,2020-bf=a*e/d 204 58 12,934 32,558 32,558 120 6,216 11,544 6,261 5,283 48 14,840 10,600 10,600 114 2,268 40,824 40,824 Total 89,265 03/01/2016 17 years 07/01/2017 10 years 09/01/2018 4 years 07/01/2020 9.5 years 001 Impaiment of Patent B* YEAR Present value expected cash discount factor at flow 8% 2021 2050 0.92593 2022 2050 0.85734 2023 2050 0.79383 1,898 1,758 1.627 5,283 carrying value of Patent Bas at Dec 31,2020 before impairment Hence impaiment = (11544-5283) 11,544 6,261