Sweitzer Printers incurred external costs of $400,000 for a patent for a new laser printer. Although the patent gives legal protection for 20 years, it was expected to provide Sweitzer with a competitive advantage for only ten years due to expected technological advances in the industry. Sweitzer uses the straight-line method of amortization.
After using the patent for five years, Sweitzer learned at an industry trade show that Kaytown Printers has patented a more efficient printer and will be selling this printer next quarter. Because of this new information, Sweitzer determined that the expected future cash flows from its patent were now only $130,000. The fair value of Sweitzer’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 Sweitzer 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.