Jung Inc. owns a patent for which it paid $66 million. At the end of 2013, 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 loss 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.

Question

Quizplus · Accepted Answer

The impairment loss should be recognized if the carrying amount of the asset exceeds the sum of the undiscounted future cash flows expected to result from its use and eventual disposition. In this case, the carrying amount of the patent is $66 million - $16 million = $50 million, which exceeds the sum of the undiscounted future cash flows of $43 million. Therefore, an impairment loss should be recognized.

The impairment loss would be the difference between the carrying amount and the fair value, which is $50 million - $35 million = $15 million. Therefore, the correct option is C, and a $15 million impairment loss should be recorded on the patent.

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