Impairment of Intangibles An intangible asset cost $300,000 on January 1, 2013.

Question

Impairment of Intangibles

An intangible asset cost $300,000 on January 1, 2013. On January 1, 2014, the asset was evaluated to determine whether it was impaired. As of January 1, 2014, the asset was expected to generate future cash flows of $25,000 per year (at the end of the year). The appropriate discount rate is 5%.

1. Give the entries to record amortization in 2013 and any impairment loss in 2014 assuming that as of January 1, 2013, the asset was assumed to have a total useful life of 10 years and that as of January 1, 2014, there were nine years remaining.

Click here to access the PV table to calculate the undiscounted future cash flows and round your answer to the nearest dollar. If no entry is required, select "No entry required" and leave the amount boxes blank. If an amount box does not require an entry, leave it blank.

2. Give the entries to record amortization in 2013 and any impairment loss in 2014 assuming that as of January 1, 2013, the asset was assumed to have an indefinite useful life and that as of January 1, 2014, the remaining life was still indefinite. If no entry is required, select "No entry required" and leave the amount boxes blank. If an amount box does not require an entry, leave it blank.

1. Give the entries to record amortization in 2013 and any impairment loss in 2014 assuming that as of January 1, 2013, the asset was assumed to have a total useful life of 10 years and that as of January 1, 2014, there were nine years remaining.

Click here to access the PV table to calculate the undiscounted future cash flows and round your answer to the nearest dollar. If no entry is required, select "No entry required" and leave the amount boxes blank. If an amount box does not require an entry, leave it blank.

2. Give the entries to record amortization in 2013 and any impairment loss in 2014 assuming that as of January 1, 2013, the asset was assumed to have an indefinite useful life and that as of January 1, 2014, the remaining life was still indefinite. If no entry is required, select "No entry required" and leave the amount boxes blank. If an amount box does not require an entry, leave it blank.

Explanation / Answer

1)

Amortisation in 2013 = (300000)/10

Amortisation in 2013 = 30000

Book Value as on 1-jan 2014 = 300000-30000 = $ 270000

Recoverable value = PV of Annual cash flow

Recoverable value = 25000*PVA(5%,9)

Recoverable value = 25000*7.107822

Recoverable value = 177,696

Impairment Loss = (Carrying value - Recoverable Value)

Impairment Loss = 270000-177696

Impairment Loss = $ 92304

Journal Entry

2)

For indefinite life

Carrying Value= 300000

Fair value at the end of 2013 = 25000/5% = 500000

Since Fair value is greater than carrying value no Amortisation & impairment loss to be recorded

Journal Entry

No Entry

Account Title Debit Credit Amortisation Expenses 30000 Intangible Asset 30000 Impairment Loss 92304 Intangible Asset 92304

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