On October 1 of the current year, Lee Corporation enters negotiations with Kay C

Question

On October 1 of the current year, Lee Corporation enters negotiations with Kay Corporation to acquire a patent. The patent has 10 years remaining on its legal life. Do not round any division.

a. If Lee Corporation purchases the patent on October 1st for $36,000, Lee Corporation may deduct $ .............. in the current year as amortization expense.

b. Assume that on October 1st Lee Corporation purchases all of the assets of Kay Corporation for $510,000. All of the identifiable assets of Kay Corporation have a fair market value of $420,000, including the patent, which has a fair market value of $36,000. Also, a covenant not to compete for 3 years costing $72,000 is included in the purchase agreement.

Lee Corporation may deduct $ ............. in the current year as amortization expense.

Explanation / Answer

The spreading out of capital expenses for intangible assets over a specific period of time (usually over the asset's useful life) for accounting and tax purposes. Amortization is similar to depreciation, which is used for tangible assets, and to depletion, which is used with natural resources. Amortization roughly matches an asset’s expense with the revenue it generates.
A) Since LEE spent $36000 dollars on a patent with a useful life of 10 years. Lee would record $3600 each year as an amortization expense.

B) AMORTIZATION EXPENSE FOR THE YEAR IS FOR PATENT $36000/10=$3600

AND FOR NON COMPETE AGREEMENT 72000/3=$24000

SO TOTAL AMORTIZATION EXPENSE FOR THE YEAR IS $27600/-

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