Sprinting Printers, Inc. purchased a patent on a high-tech laser printer for \$750,000. The patent gives legal protection for twenty years, but Sprinting Printers believes that competitors will be able to mimic its capabilities in fifteen years. SP uses the straight-line method when amortizing the printer. After ten years, SP discovers that a competitor has created a more efficient holo-printer. At this point, SP determines that the estimated future cash flows of the printer are \$200,000. The fair value of the patent is zero on the open market. The entry to record the discovery of the new holo-printer would include:

• A. Credit to Patents for \$175,000
• B. Credit to Patents for \$250,000
• C. Credit to Patents for \$375,000
• D. Credit to Patents for \$750,000
• E. No entry is necessary related to these events

Answer: (B)

Verified step by step guidance

1. Determine the initial amortization period and method: The patent is initially amortized over 15 years using the straight-line method, as Sprinting Printers expects competitors to mimic its capabilities in that time frame.
2. Calculate the annual amortization expense: Divide the cost of the patent (\$750,000) by the useful life (15 years) to find the annual amortization expense.
3. Calculate the accumulated amortization after 10 years: Multiply the annual amortization expense by 10 years to find the total amortization that has been recorded up to the point of discovering the competitor's holo-printer.
4. Determine the carrying value of the patent after 10 years: Subtract the accumulated amortization from the initial cost of the patent to find its carrying value before the impairment.
5. Assess the impairment: Since the fair value of the patent is zero and the estimated future cash flows are \$200,000, compare the carrying value to these amounts to determine the impairment loss. Record the impairment loss by crediting the Patents account for the difference between the carrying value and the fair value (or future cash flows, whichever is higher).