Softsweat Inc. is a software development company. It has several products on the market, including the widely used PlayMark animation software. The cash flows from PlayMark are clearly distinguishable within Softsweat. The company has recorded development costs of $2.8 million relating to PlayMark, which is being amortized on a straight-line basis over seven years. At the end of 20X5, the carrying value was $1,960,000. Softsweat maintains a separate account for accumulated amortization on PlayMark.

In 20X5, a large U.S. company, Macrosoftie, released a competing product that has been hailed as a substantial improvement over PlayMark. However, the competing product requires installation of a great deal of additional Macrosoftie software to make the new product run efficiently. In addition, the high price may delay its acceptance by some users.

Because of the new competition, Softsweat management decided that an impairment test should be performed. In January 20X6, as the 20X5 financial statements were being prepared, the company hired a professional business valuator. The valuator's appraisal was that the fair value of PlayMark at the end of 20X5 was $1,000,000.

Required:

1. Prepare the necessary adjusting journal entry to record the results of the impairment test.

2. Suppose that in 20X6, the Macrosoftie product was found to be unreliable and that the sales of PlayMark returned to almost their 20X4 level. The fair value of PlayMark therefore was $1,600,000 at the end of 20X6.

a. What would the carrying value of the assets have been if the impairment had not been recorded?

b. How (if at all) would the increase in the recoverable amounts be recorded in Softsweat's financial statements for 20X6