Harrel Company acquired a patent on an oil extraction technique on January 1, 2010 for $5,000,000.It was expected to have a 10 year life and no residual value.Harrel uses straight-line amortization for patents.On December 31, 2011, the recoverable amount of the patent was estimated to be $4,500,000.At what amount should the patent be carried on the December 31, 2011 balance sheet?

Question

Quizplus · Accepted Answer

The patent should be amortized over its useful life. By December 31, 2011, two years of amortization would have occurred, reducing the carrying amount by $1,000,000 (2 years x $500,000 per year). The carrying amount before considering impairment is $4,000,000. Since the recoverable amount is $4,500,000, which is higher than the carrying amount, no impairment loss is recognized, and the patent is carried at $4,000,000.

Harrel Company Acquired a Patent on an Oil Extraction Technique