The following information relates to a patent owned by Gentry Company:Cost $3,400,000Carrying amount $1,700,000Expected future cash flows $1,500,000Fair Value $1,200,000Instructions (a) Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2016. (b) Using the same assumption as part (a) above, prepare the journal entry to record amortization expense for 2017 assuming the asset has a remaining useful life of 3 years at the beginning of 2017. (c) Using the same assumption as part (a) above, prepare the journal entry (if any) at December 31, 2017, assuming the fair value of the asset has increased to $1,900,000. (d) Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2016, assuming Gentry ceased using the patent at the end of 2016 and intends to dispose of the patent in the coming year. Gentry expects to incur a $10,000 cost of disposal. CAL STATE SAN BERNARDINO - DEPT OF ACCT & FINANCE - PROF M. HENRY Page 5 Expected future net cash flow 1,500,000 Fair value 1,200,000 Cost $3,400,000 Carrying amount 1,700,000

Gentry Company

a) Journal Entry to record the impairment of the patent at December 31, 2016:

Debit Impairment Loss on Patent $500,000

Credit Patent $500,000

To record the impairment loss.

b) Journal entry to record amortization expense for 2017 assuming the asset has a remaining useful life of 3 years at the beginning of 2017:

Debit Patent Amortization Expense $400,000

Credit Accumulated Amortization $400,000

To record the amortization expense for the year.

c) (c) Using the same assumption as part (a) above, prepare the journal entry (if any) at December 31, 2017, assuming the fair value of the asset has increased to $1,900,000:

Debit Patent $200,000

Credit Impairment Gain $200,000

To record impairment gain.

(d) Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2016, assuming Gentry ceased using the patent at the end of 2016 and intends to dispose of the patent in the coming year. Gentry expects to incur a $10,000 cost of disposal:

Debit Impairment Loss $200,000

Credit Patent $200,000

To record the impairment loss on disposal.

Debit Cost of Disposal of Patent $10,000

Credit Cash Account $10,000

To record the cost of disposal of the patent.

Explanation:

a) Data and Calculations:

1) Patent:

Cost $3,400,000

Carrying amount $1,700,000

Expected future cash flows $1,500,000

Fair Value $1,200,000

2) Assumptions:

a) Impairment at December 31, 2016:

Carrying amount $1,700,000

Fair Value            $1,200,000

Impairment =         $500,000

b) Amortization for 2017:

Carrying amount $1,200,000

Remaining useful life = 3 years

Amortization expense for 2017 = $400,000 ($1,200,000/3)

c) Impairment Testing for 2017:

Carrying amount = $1,700,000

Fair value =             $1,900,000

Impairment Gain =   $200,000

d) Gentry ceased using the patent at the end of 2016 and intends to dispose of the patent in the coming year. Gentry expects to incur a $10,000 cost of disposal:

December 31, 2016:

Carrying amount $1,700,000

Expected future cash flows $1,500,000

Disposal cost = $10,000

Impairment loss = $200,000

b) The accountants at Gentry Company can calculate the patent's impairment loss as the difference between the patent's carrying value and its fair market value.  The journal entry to record an impairment loss is a debit to the Patent Impairment Loss account and a credit to the related Patent account.  An impairment gain can arise when the patent's fair value is higher than the carrying value.

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