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?
A)$10,000,000
B)$8,000,000
C)$6,400,000
D)$4,800,000

Question

Quizplus · Accepted Answer

The patent should be carried at the lower of its carrying amount or its recoverable amount. The carrying amount after two years of amortization is $8,000,000 ($10,000,000 - $2,000,000). The recoverable amount, which is the present value of future cash flows, is $4,800,000. Therefore, the patent should be carried at $4,800,000.

Malrom Manufacturing Company Acquired a Patent on a Manufacturing Process