Racer Company acquired patent rights on January 1, 2013 for $1,080,000. The pate
ID: 2420280 • Letter: R
Question
Racer Company acquired patent rights on January 1, 2013 for $1,080,000. The patent has a useful life equal to its legal life of 15 years. On January 2, 2016, Racer successfully defended the patent in a lawsuit at a cost of $78,000.
(1)
Determine the patent amortization expense for the current year ended December 31, 2016.
(2)
Identify and analyze the effects of the transaction to recognize the amortization.
(1)
Determine the patent amortization expense for the current year ended December 31, 2016.
(2)
Identify and analyze the effects of the transaction to recognize the amortization.
Explanation / Answer
1. Racer company acquired patent rights on january 1, 2013 for $ 1,080,000.
Annual amortization of the patent =$ 1,080,000/15= $ 72,000 for each year from 2013 to 2015.
Dr. Amortization-patents $72,000
Cr. Patents $72,000
At the end of 2015, patents account would be down to $ 864,000.
2.Amortisation expense for current year 2016:
On january 2,2016 Racer company successfully defended the patent in a law suit at a cost $78,000.
Capitalise $78000 to patents, arriving at $942,000. You have to depreciate this over the remaining 12 years, so $942,000/12= $78,500.
3. The effects of the Transaction:
When you defend a lawsuit SUCCESSFULLY, you capitalise the amount spent, but if it was unsuccessful, you write off the amount to legal fee expense.
Hence the patents account will be Capitalised with the cost incurred i.e., $78,000.
Dr Amortization -patents $78,500
Cr Patents $78,500
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