Question

Kenoly Corporation owns a patent that has a carrying amount of \(300,000. Kenoly expects future net cash flows from this patent to total \)210,000. The fair value of the patent is $110,000. Prepare Kenoly’s journal entry, if necessary, to record the loss on impairment.

Short answer

Expected net future cash flows ($210,000) are less than the carrying value ($300,000), resulting in impairment. The difference between the carrying amount and fair value ($110,000) is used to calculate the loss.

Step-by-step solution

Step-by-Step SolutionStep 1: Calculation

Patents are limited-life intangible assets; hence an impairment test is required in two steps.

1: Compare the carrying amount to the future net cash flows; impairment is necessary if the carrying amount exceeds the future net cash flows.

2: Determine the impairment loss by subtracting the carrying amount from the fair value.

Journal Entry

Date	Particulars	JF	Debit	Credit
	Loss on Impairment ($300,000 - $110,000)		$190,000
	Patents			$190,000
	(Being Impairment loss is recorded)