January 2, 2012, Koll, Inc. purchased a patent for a new consumer product for $600,000. At the time of purchase, the patent was valid for 15 years; however, the patent's useful life was estimated to be only 10 years due to the competitive nature of the product. On December 31, 2015, the product was permanently withdrawn from the market under governmental order because of a potential health hazard in the product. What amount should Koll charge against income during 2015, assuming amortization is recorded at the end of each year?
A) $ 60,000
B) $360,000
C) $420,000
D) $480,000

Question

Quizplus · Accepted Answer

The patent was purchased for $600,000 and had a useful life of 10 years. Therefore, the annual amortization expense would be $60,000 ($600,000/10 years). Koll would have recorded amortization expense of $180,000 ($60,000 x 3 years) through December 31, 2015. However, since the product was permanently withdrawn from the market on that date, the remaining unamortized balance of $420,000 ($600,000 - $180,000) should be charged against income in 2015 as an impairment loss. Therefore, the correct answer is C) $420,000.