On January 2, 2017, Albion Corp. purchased a patent for a new consumer product for $ 45,000. At the time of purchase, the patent was valid for 15 years. Due to the competitive nature of the product, however, the patent was estimated to have a useful life of only ten years. During 2020, the product was permanently removed from the market because of a potential health hazard. What amount should Albion recognize as an impairment loss for calendar 2020, assuming amortization has been recorded annually using the straight-line method with no residual value?
A) $ 4,500
B) $ 27,000
C) $ 31,500
D) $ 36,000

Question

Quizplus · Accepted Answer

The patent had a useful life of 10 years, meaning that Albion had already amortized the patent for 4 years (2017-2020). The annual amortization expense would be $3,000 ($45,000 / 15 years) each year for the 15-year life of the patent. Therefore, the patent's carrying amount at the end of 2020 would be $33,000 ($45,000 - ($3,000 x 4)). Since the patent was permanently removed from the market in 2020, it has no future economic benefit, and the carrying amount would be written off as an impairment loss. The impairment loss would be $31,500 ($33,000 carrying amount - $1,500 fair value), which is the amount that the patent's carrying amount exceeds its fair value.