Harrel Company acquired a patent on an oil extraction technique on January 1, 20

Question

Harrel Company acquired a patent on an oil extraction technique on January 1, 2010 for $5,000,000. It was expected to have a 10 year life and no residual value. Harrel uses straight-line amortization for patents. On December 31, 2011, the expected future cash flows expected from the patent were expected to be $600,000 per year for the next eight years. The present value of these cash flows, discounted at Harrel’s market interest rate, is $2,800,000. At what amount should the patent be carried on the December 31, 2011 balance sheet?

a. $5,000,000
b. $4,800,000
c. $4,000,000
d. $2,800,000

Explanation / Answer

patent on January 1, 2010 for $5,000,000 10 year life amortization for 2010 $500,000 patents on December 31, 2011 - $4,500,000 amortization for 2010 $500,000 amount should the patent be carried on the December 31, 2011 - $4,000,000 At what amount should the patent be carried on the December 31, 2011 balance sheet? - $4,000,000 c. $4,000,000 - Correct answer

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