Question

(Copyright Impairment) Presented below is information related to copyrights owned by Mare Company at December 31, 2017.

Cost	\(8,600,000
Carrying amount	4,300,000
Expected future net cash flows	4,000,000
Fair value	3,200,000

Assume that Mare Company will continue to use this copyright in the future. As of December 31, 2017, the copyright is estimated to have a remaining useful life of 10 years.

Instructions

1. Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2017. The company does not use accumulated amortization accounts.
2. Prepare the journal entry to record amortization expense for 2018 related to the copyrights.
3. The fair value of the copyright at December 31, 2018, is \)3,400,000. Prepare the journal entry (if any) necessary to record the increase in fair value.

Short answer

1. Loss on impairments = $1,100,00
2. Amortization value= $320,000
3. No entry is necessary

Step-by-step solution

Step-by-Step SolutionStep 1: Meaning of Copyright

The term "copyright" refers to the exclusive right to reproduce a work by the creator or his authorized representative. In simpler terms, a copyright is a legal right that belongs to the owner of intellectual property.

(a) Preparing journal entry to record the impairment of the asset at December 31, 2017

Date	Particular	Debit ($)	Credit ($)
Dec. 31, 2017	Loss on Impairment	1,100,000
	Copyrights		1,100,000

Working Notes:

Calculating the amount of loss on impairment

Carrying amount	$4,300,000
Fair value	3,200,000
Loss on impairment	$1,100,000

Note: The estimated net cash flows of $4,000,000 are less than the carrying value of $4,300,000. The asset fails the recoverability test.

(b) Preparing the journal entries to record amortization expenses for 2018 related to the copyrights.

Date	Particular	Debit ($)	Credit ($)
	Amortization Expense	320,000
	Copyrights		320,000

Working notes:

Calculating the amount of amortization expense

New carrying amount	$3,200,000
Useful life	10 years
Amortization per year	$ 320,000

(c) Explaining journal entry to record the increase in fair value

No entry is necessary to record the increase in the fair value of copyright. For assets kept for use, restoration of any impairment loss is not authorized.