In January, 2005, Targa Corporation purchased a patent for a new consumer product for $900,000.At the time of purchase, the patent was valid for fifteen years.Due to the competitive nature of the product, however, the patent was estimated to have a useful life
Of only ten years.During 2010 the product was permanently removed from the market
Under governmental order because of a potential health hazard present in the product.What amount should Targa recognize as an impairment during 2010, assuming amortization is recorded at the end of each year?
A)$600,000.
B)$450,000.
C)$90,000.
D)$60,000.

Question

Quizplus · Accepted Answer

The purchase price of the patent was $900,000 and it had a useful life of 10 years, so the annual amortization expense is $90,000 ($900,000/10). By the end of 2010 (i.e. after 6 years), the total amortization expense would be $540,000 ($90,000 x 6). Since the patent was permanently removed from the market, it is considered impaired and must be written down to its fair value. Since the patent is no longer on the market, its fair value is zero, and Targa would need to recognize an impairment loss of $360,000 ($900,000 - $540,000). Therefore, the answer is B, $450,000.

In January, 2005, Targa Corporation Purchased a Patent for a New