Question: Tones Industries has the following patents on its December 31, 2016,

balance sheet.

Patent Item Initial Cost Date Acquired Useful Life at Date

Acquired
Patent A $30,600 3/1/13 17 years
Patent B $15,000 7/1/14 10 years
Patent C $14,400 9/1/15 4 years

The following events occurred during the year ended December 31, 2017.

1. Research and development costs of $245,700 were incurred during the year.

2. Patent D was purchased on July 1 for $36,480. This patent has a useful life of
9½ years.

3. As a result of reduced demands for certain products protected by Patent B, a

possible impairment of Patent B’s value may have occurred at December 31,
2017. The controller for Tones estimates the expected future cash flows from
Patent B will be as follows.

Year Expected Future Cash Flows

2018 $2,000
2019 2,000
2020 2,000

The proper discount rate to be used for these flows is 8%. (Assume that the cash
flows occur at the end of the year.)

Instructions

(a) Compute the total carrying amount of Tones’ patents on its December 31,
2016, balance sheet.

(b) Compute the total carrying amount of Tones’ patents on its December 31,
2017, balance sheet.

Answer

(a) $44,550

(b) $67,614

Step-by-Step Solution
Step1- Total carrying amount of Tones’ patents on its December 31, 2016

Patent A

Life in years 17
Life in months 204
Amortization per month $150

Number of months to be amortized to date:

Year Month
2013 10
2014 12
2015 12
2016 12
46

Book value 3/1/13 $23,700:

Patent B

Life in years 10
Life in months 120
Amortization per month $125

Number of months to be amortized to date:

Year Month
2014 6
2015 12
2016 12
30

Book value 7/1/14 $11,250:

Patent C

Life in years 4
Life in months 48
Amortization per month $300
Number of months to be amortized to date:

Year Month
2015 4
2016 12
16

Book value 9/1/15 $9,600:

At December 31, 2016

Patent A $23,700
Patent B 11,250
Patent C 9,600
Total $44,550

Step2- Total carrying amount of Tones’ patents on its December 31, 2017

Analysis of 2017 transactions

1. The $245,700 incurred for research and development should be expensed.

2. The book value of Patent B is $11,250 and its estimated future cash flows are
$6,000; therefore Patent B is impaired. The impairment loss is imputed as
follows:

Book value $11,250

Less: Present value of future cash flows 5,154

Loss recognized $6,096

Patent B carrying amount $5,154

At December 31, 2017

Patent A $21,900
Patent B 5,154 (Present value of future cash flows)
Patent C 6,000
Patent D 34,560
Total $67,614
Patent D amortization

Life in years 9½
Life in months 114
Amortization per month $320