Reference no: EM132848834

Question - Rho Inc., a public company, is a software development company which has several products on the market, including the widely used Playmark animation software. The company has recorded development costs of $2.8 million relating to PlayMark, which is being amortised on a straight-line basis over seven years. At the end of 2019, the carrying value was $1,960,000. Rho maintains a separate account for accumulated amortization on Playmark.

In 2019, another company, Gamma Inc. released a competing product that has been hailed as a substantial improvement over PlayMark. Because of the new competition, Rho's management decided that an impairment test should be made. Playmark was appraised to have a fair value of $1,000,000 at the end of 2019. Its value in use was estimated to be $900,000 and the selling costs were considered to be negligible. In addition, the sum of future undiscounted cash flows associated with Playmark was estimated to be $1,500,000.

Required -

1. Make any necessary adjusting entry by Rho Inc. to record the results of the impairment test at the end of 2019.

2. Suppose that in 2020, the Gamma product was found to be unreliable and that the sales of Playmark returned to almost their 2018 level. The fair value (and recoverable amount) of Playmark therefore was $1,600,000 at the end of 2020. How (if at all) would this change be recorded in Rho's financial statements in 2020?