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 patents estimated useful life is 9 years. The patent is sold on February 1, 2018 for an amount of $300,000. What is the gain or loss that will be 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?

How will this be measured?

Prepare the journal entries to record. How does this look on accounting equation and in T-Account form?

Explanation / Answer

1. Original cost = 450000

Useful Life = 9 years

Amortization on SLM = 450000/9 = 50000

Sale price = 300000

Value on Feb 1 2018 = 450000 - (50000*3.5 years) = 275000

Profit = 300000-275000 = 25000

2. Revenue recognition is the economic event behind this problem

GAAP Rules - Revenue must be recognised immediately whether it is received or not

3. Journal Entry

Cash A/c Dr. 300000

To Patents A/c 275000

To Profit & Loss A/c 25000

(being patent sold)

4. T A/c

5. Accounting equation

Fixed Assets = -275000

Current Assets (cash) = +300000

Capital = +25000

Particulars Amount Particulars Amount To Balance b/d 450000 By Amortization 175000 To Profit and loss A/c 25000 By Cash 300000

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