Kenoly incorporation Owns a patent that has a carrying amount $300,000. Kenoly expect future net cash flows from this patent to total $210,000. The fair value of the patent in $110,000. Prepare kenoly's journal entry, if necessary, to record the loss on impairment.

Answer 1

To determine whether an impairment loss needs to be recorded, we compare the carrying amount of the patent with its recoverable amount, which is the higher of fair value and the net cash flows expected from the asset.

1. Carrying amount of the patent: $300,000
2. Future net cash flows expected: $210,000
3. Fair value of the patent: $110,000

Now, we need to find the recoverable amount:

• Recoverable amount = Higher of Future net cash flows ($210,000) and Fair value ($110,000)
• Recoverable amount = $210,000 (since it is higher than the fair value)

Since the carrying amount of the patent ($300,000) exceeds the recoverable amount ($210,000), an impairment loss is recognized.

Impairment loss calculation:

• Impairment Loss = Carrying amount - Recoverable amount
• Impairment Loss = $300,000 - $210,000 = $90,000

Journal Entry

To record the impairment loss, the following journal entry would be made:

Date          Account Title               Debit          Credit
------------------------------------------------------------------
YYYY-MM-DD    Impairment Loss             90,000
              Patent                                      90,000

Explanation:

• The "Impairment Loss" account is debited to recognize the loss, and the "Patent" account is credited to reduce the carrying amount of the patent.