On June 30,2011, Mobley Corporation acquired a patent for $4millon. The patent w

Question

On June 30,2011, Mobley Corporation acquired a patent for $4millon. The patent was estimated to have an eight-year life and no residual value. Mobley uses the straight -line method of amortization for intangible assets. At the beginning of January 2013, Mobley successfully defended its patent against infringement. Litigation costs totaled $650,000. Required: Calculate patent amortization for 2011 and 2012 Prepare the journal entry to record the 2013 litigation costs. Calculate amortization for 2013.

Explanation / Answer

Calculation of Amortization of Patent = Cost of Patent / No. of years of expected Life Calculation of Amortization of Patent = $4000000 / 8 years= $500,000 per annum Answer 1. Amount of Amortization of 2011 = $500000/2 = $250000 (Since, the patent is amortized for the period from July 1, 2011 to Dec 31, 2011 i.e., for 6 months Amount of Amortization of 2012 = $500000 Answer 2. Journal Entry to record the litigation expense is: Litigation Expenses A/c                      Dr. $650,000       To Bank A/c / Cash A/c $650,000 (Amt. incurred for litigation of patent against infringement) Patent A/c                                                Dr. $650,000      To Litigation Exp. A/c $650,000 (Litigation expenses capitalized) Answer 3. Balance of Patent as on 31.12.2012 = $4000000 - $250000 - $500000 = $3250000 Balance Life left for Patent = 6.50 Years Value of Patent on 1.1.2013 = $3250000 + $650000 (Litigation Expenses) Value of Patent on 1.1.2013 = $3900000 Amount of amortization of patent per annum = $3900000 / 6.50 years Amount of amortization of patent per annum = $600000 Amt. of amortization in the year 2013 = $600000

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