Monday, 17 March 2014

Nutek, Inc., holds a patent for the Full Service™ handi-plate, which the company described as “a patented plastic buffet plate that allows the user to hold both a plate and cup in one hand” and that “has a multitude of uses including social gatherings such as backyard barbecues, buffets, picnics, and parties of any kind.” (No, we’re not making this up.) Nutek also purchased a patent for $1,009,000 for “a specialty line of patented switch plate covers and outlet plate covers specifically designed to light up automatically when the power fails.” Assume the switch plate patent was purchased January 1, 2009, and it is being amortized over a period of 14 years. Assume Nutek does not use an accumulated amortization account but instead charges amortization directly against the intangible asset account.


Nutek, Inc., holds a patent for the Full Service™ handi-plate, which the company described as “a patented plastic buffet plate that allows the user to hold both a plate and cup in one hand” and that “has a multitude of uses including social gatherings such as backyard barbecues, buffets, picnics, and parties of any kind.” (No, we’re not making this up.) Nutek also purchased a patent for $1,009,000 for “a specialty line of patented switch plate covers and outlet plate covers specifically designed to light up automatically when the power fails.” Assume the switch plate patent was purchased January 1, 2009, and it is being amortized over a period of 14 years. Assume Nutek does not use an accumulated amortization account but instead charges amortization directly against the intangible asset account.


Requirement 2:
Give the journal entries to record the purchase and amortization of the switch plate patent in 2009. (Round your answers to the nearest dollar amount. Omit the "$" sign in your response.)
 
Event
General Journal
Debit
Credit
  a
  Patent



       Cash






  b
  Amortization expense



       Patent



 
Requirement 3:
After many months of unsuccessful attempts to manufacture the switch plate covers, Nutek determined the patent was significantly impaired and its book value on January 1, 2010, was written off. Describe the financial statement effects of accounting for the asset impairment and give the journal entry to record the impairment. (Round your answers to the nearest dollar amount. Omit the "$" sign in your response.)
 
Event
General Journal
Debit
Credit
  a
  Impairment loss



        Patent



 

Explanation:
Amortization expense = $1,009,000 × 1/14 = $72,071
 
The impairment appears on the income statement in the form of the $936,929 loss at the end of 2010.  This loss would be included with operating expenses before the Income from Operations subtotal.  The patent would no longer appear on the balance sheet.

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