Milton Printers incurred external costs of $700,000 for a patent for a new laser printer. Although the patent gives legal protection for 20 years, it was expected to provide Milton with a competitive advantage for only eight years due to expected technological advances in the industry. Milton uses the straight-line method of amortization.
After using the patent for four years, Milton learned at an industry trade show that Anderson Printers has patented a more efficient printer and will begin selling the new printer next quarter. Because of this new information, Milton determined that the expected future cash flows from its patent were now only $270,000. The fair value of Milton’s patent on the open market was now zero.
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1. Write the journal entries to record (a) the purchase of the patent and (b) amortization for year 1.
2. Once Milton learned of the competing printer and adjusted the expected future cash flows from its original patent, was this asset impaired? If so, make the impairment adjusting entry.