Fields Laboratories holds a valuable patent (No. 758-6002-1A) on a precipitator

Question

Fields Laboratories holds a valuable patent (No. 758-6002-1A) on a precipitator that prevents certain types of air pollution. Fields does not manufacture or sell the products and processes it develops. Instead, it conducts research and develops products and processes which it patents, and then assigns the patents to manufacturers on a royalty basis. Occasionally it sells a patent. The history of Fields patent number 758-6002-1A is as follows.

Date

Activity

Cost

Fields assumed a useful life of 17 years when it received the initial precipitator patent. On January 1, 2016, it revised its useful life estimate downward to 5 remaining years. Amortization is computed for a full year if the cost is incurred prior to July 1, and no amortization for the year if the cost is incurred after June 30. The company’s year ends December 31.

Compute the carrying value of patent No. 758-6002-1A on each of the following dates:

Date

Activity

Cost

2008–2009 Research conducted to develop precipitator $370,000 Jan. 2010 Design and construction of a prototype 85,800 March 2010 Testing of models 37,800 Jan. 2011 Fees paid engineers and lawyers to prepare patent application;    patent granted June 30, 2011 56,100 Nov. 2012 Engineering activity necessary to advance the design of the    precipitator to the manufacturing stage 86,000 Dec. 2013 Legal fees paid to successfully defend precipitator patent 37,800 April 2014 Research aimed at modifying the design of the patented precipitator 38,800 July 2018 Legal fees paid in unsuccessful patent infringement suit against a    competitor 34,000

Explanation / Answer

Part a)

The carrying value as on December 31, 2011 is determined as below:

_____

Part b)

The carrying value as on December 31, 2015 is calculated as follows:

_____

Notes:

The 2012 and 2014 costs are treated as research and development costs. Such costs are expensed as incurred. Therefore, such costs are not included in the cost of patent.

_____

Part c)

The carrying value as on December 31, 2018 is arrived as below:

_____

Notes:

The value of legal expenses incurred in 2018 will be expensed as the lawsuit was unsuccessful.

_____

Tabular Representation (As Required in Question)

Cost of Acquiring Patent, January 2011 56,100 Less Amortization for 2011 (56,100/17) 3,300 Carrying Value, December 31, 2011 $52,800

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