In January, 2015, Tillicum Corp. purchased a patent for a new consumer product for $ 900,000. At the time of purchase, the patent was valid for 15 years. Due to the competitive nature of the product, however, the patent was estimated to have a useful life of only ten years. During 2020, the product was permanently removed from the market because of a potential health hazard. What amount should Tillicum recognize as an impairment loss for calendar 2020, assuming amortization has been recorded annually using the straight-line method with no residual value?
A) $ 600,000
B) $ 450,000
C) $ 90,000
D) $ 60,000

Question

Quizplus · Accepted Answer

The carrying amount of the patent at the end of 2019 (after 5 years of amortization) would be:

Cost of patent: $900,000
Less: Accumulated amortization (5 x $60,000) = $300,000
Carrying amount at end of 2019: $600,000

The impairment loss would be the difference between the carrying amount of the patent and its fair value less costs to sell. Given that the product has been permanently removed from the market, it is unlikely that there is any fair value associated with the patent. Therefore, the impairment loss would simply be the carrying amount of the patent at the end of 2019, which is $600,000.