Malrom Manufacturing Company acquired a patent on a manufacturing process on January 1, 2014 for $3,750,000. It was expected to have a 10 year life and no residual value. Malrom uses straight-line amortization for patents. On December 31, 2015, the expected future cash flows expected from the patent were expected to be $300,000 per year for the next eight years. The present value of these cash flows, discounted at Malrom's market interest rate, is $1,800,000. At what amount should the patent be carried on the December 31, 2015 balance sheet?
A) $3,750,000
B) $ 3,000
C) $2,400,000
D) $1,800,000

Question

Quizplus · Accepted Answer

The patent should be carried at its recoverable amount, which is the present value of the expected future cash flows ($1,800,000), since this is lower than its carrying amount on the balance sheet.

Malrom Manufacturing Company Acquired a Patent on a Manufacturing Process