On January 2, 2014, Albion Corp.purchased a patent for a new consumer product for $45,000.At the time of purchase, the patent was valid for fifteen years.Due to the competitive nature of the product, however, the patent was estimated to have a useful life of only ten years.During 2017, the product was permanently removed from the market because of a potential health hazard.What amount should Albion recognize as an impairment loss for calendar 2017, assuming amortization has been recorded annually using the straight-line method with no residual value?
A)$4,500
B)$27,000
C)$31,500
D)$36,000

Question

Quizplus · Accepted Answer

The carrying value of the patent at the end of 2017 can be calculated as follows:

Cost of patent = $45,000
Less: Accumulated amortization (straight-line method) = ($45,000 / 10) x 4 = $18,000
Carrying value at end of 2017 = $27,000

Since the patent is no longer useful and has been permanently removed from the market, it is considered impaired. The impairment loss is calculated as the carrying value of the patent minus its fair value. Since there is no information given about the fair value of the patent, we assume it to be zero. Therefore, the impairment loss for 2017 would be:

Impairment loss = Carrying value of patent - Fair value of patent
Impairment loss = $27,000 - $0 = $27,000

Therefore, the best choice is C) $31,500.