Question

Lawson Corp. uses IFR.S and the cost model for intangible assets. On March 1, year 1, Lawson acquired intangible assets with an indefinite life for $100,000. On December 31, year 1, it was determined that the recoverable amount for these intangible assets was $90,000. On December 31, year 2, it was determined that the intangible assets had a recoverable amount of $94,000. What is the impairment gain or loss recognized in year 1 and year 2 on the income statement?
Year I Year 2
a. $10,000 loss $6,000 loss
b. $10,000 loss $4,000 gain
c. $10,000 loss $0
d. $0 $0

Answer 1

Answer:

b. $10,000 loss $4,000 gain

Explanation:

Since the carrying amount of the intangible assets is greater than its recoverable amount in the year 1, therefore the Lawson Corp shall recognised the impairment loss in respect of intangible assets in year 1 as follows:

Impairment loss=Carrying amount of intangible assets-recoverable amount of intangible asset

Impairment loss=$100,000-$90,000=$10,000 loss

Since the recoverable amount of the intangible assets is greater than its carrying amount  in the year 2, therefore the Lawson Corp shall reverse the impairment loss recognised in year 1 in the following way:

Gain=recoverable amount of intangible asset-Carrying amount of intangible assets

Gain=$94,000-$90,000=$4,000 Gain

So based on the above calculations,the answer shall be b. $10,000 loss $4,000 gain