Moon Company purchased a patent with an original cost of $450,000 on August 1, 2

Question

Moon Company purchased a patent with an original cost of $450,000 on August 1, 2014. The patent's estimated useful life is 9 years. The reported assuming that the patent was properly amortized using the straight-line method? What is the economic event behind this problem? What are the GAAP recognition rules, theory or concept? patent is sold on February 1, 2018 for an amount of $300,000. What is the gain or loss that will be How will this be measured? form? Prepare the journal entries to record. How does this look on the accounting equation and in T-Account Stockholders' Equity Balance sheet Assets - Balance Sheet Liabilities Current Assets Long- term Assets Current Liabilities Long-termCapital Liabilities Retained Earnings Other Income

Explanation / Answer

The value of intangible assets diminishes over time; this decrease in value is the amortization recorded in every accounting period throughout the asset’s economic life. For intangible assets with definite lives, the amortization is calculated by taking the capitalized cost and dividing by the asset’s economic life. Patents have the option of amortization over their economic life or their remaining legal life. Assets with indefinite lives and goodwill are not amortized but are tested for impairment

Normally an intangible asset can be amortised for a period of 10 years, it should get a proof and declaration if it has a life in excess of 10 years and mostly straight line method of depreciation is used for amortizing the intangible asset.

Different approaches of patent valuation are used by companies and organizations. Generally, these approaches are divided in two categories: the quantitative and qualitative valuation.

Quantitative approach

Several methodologies are used on the quantitative approach, but generally they can be grouped in four methods:

Qualitative approach

This method does not rely on purely financial analytical data. In fact, the valuation in this method is performed through the analysis of different indicators with the purpose of rating the patent right, i.e. of determining its importance quality in terms of aspects that can impact the value of an intellectual property asset, covering legal aspects, the technology level of the innovation, market details and company organization.

Here in this case

Cost of patent = 450000

life of patent = 9 Yrs

Amortizing value per year = 450000/9 = 50000

Journal Entry:

Amortization expense A/c...............Dr20833 (50000*5/12)

......................To Patents A/c.................20833

(Amortized for year 2014)

Amortization expense a/c .................Dr 50000

......................To Patents A/c ...........................50000

(Amortized for 2015)

Amortization expense a/c .................Dr 50000

......................To Patents A/c ...........................50000

(Amortized for 2016)

Amortization expense a/c .................Dr 50000

......................To Patents A/c ...........................50000

(Amortized for 2017)

Amortization expense a/c .................Dr 4167 (50000*1/12)

......................To Patents A/c .....................4167

(Amortized for 2018)

Bank A/c............................Dr 300000

..............To Patents A/c......................275000(400000-175000)

..............To Profit on Sale A/c...............25000

(Being Sale of Patents and Profit recognised)

In accounting equation

Current assets+ Long term assets = Current liabilities+ Long term Liabilities+ Contributed Capital+ Retained Earnings+ Accumulated other comprehensive income

300000+(275000)=0+0+0+25000+0

This is how it appears

Thank You

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