Malrom Manufacturing Company acquired a patent on a manufacturing process on Jan

Question

Malrom Manufacturing Company acquired a patent on a manufacturing process on January 1, 2006 for $10,000,000. It was expected to have a 10 year life and no residual value. Malrom uses straight-line amortization for patents. On December 31, 2007, the expected future cash flows expected from the patent were expected to be $800,000 per year for the next eight years. The present value of these cash flows, discounted at Malrom’s market interest rate, is $4,800,000. At what amount should the patent be carried on the December 31, 2007 balance sheet?

Explanation / Answer

Expected Future Cash Flows :- $800,000* 8 years = $6,400,000.

Present Value of these cash flows :- $4,800,000

Value as on 31st December, 2007 after amortization :- ($10,000,000 - [($10,000,000 / 10)*2]

= $8,000,000

Since, $8,000,000> $6,400,000, patent is to be reported at $4,800,000 i.e. at present value of future cash flows.

Related Questions

Navigate

• Browse (All)
• Browse M
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.