Jung Inc. owns a patent for which it paid $66 million. At the end of 2009, it had accumulated amortization on the patent of $16 million. Due to adverse economic conditions, Jung's management determined that it should assess whether an impairment should be recognized for the patent. The estimated undiscounted future cash flows to be provided by the patent total $43 million, and the patent's fair value at that point is $35 million. Under these circumstances, Lester:
A)Would record no impairment loss on the patent.
B)Would record a $7 million impairment loss on the patent.
C)Would record a $15 million impairment loss on the patent.
D)Would record a $31 million impairment loss on the patent.The patent fails the recoverability test, and the impairment is measured by the difference between its fair value of $35 million and its book value of $50 million ($66 million 16 million).

Question

Quizplus · Accepted Answer

Based on the information provided, the estimated undiscounted future cash flows of $43 million is less than the carrying value of the patent which is $50 million ($66 million - $16 million). Moreover, the fair value of the patent is only $35 million, which is lower than the carrying value. Therefore, an impairment loss must be recognized. The impairment loss is calculated as the difference between the carrying value and the fair value. Thus, the impairment loss is $15 million ($50 million - $35 million). Therefore, the best choice is option C.

Jung Inc Owns a Patent for Which It Paid $66 Million