Question

Indigo Corporation owns a patent that has a carrying amount of $290,000. Indigo expects future net cash flows from this patent to total $240,000. The fair value of the patent is $152,000. Prepare Kenoly's journal entry if necessary, to record the losson impairment.

Answer 1

Step-by-step explanation:

Since the book value is more than the generated future cash flows so book value cannot be recovered. In this situation, the generated future cash flows are ignored

So for this, we make a comparison between the book value and the fair value of patent, the difference is recognized as a the loss on impairment of the asset

In mathematically,

= Carrying value - fair value

= $290,000 - $152,000

= $138,000

The journal entry is shown below:

Loss on impairment A/c Dr $138,000

To Patent A/c $138,000

(Being loss on impairment is recorded)