E9-25 Handling acquisition of patent, amortization, and change in useful life Me

Question

E9-25 Handling acquisition of patent, amortization, and change in useful life Melbourn Printers (MP) manufactures printers. Assume that MP recently paid $200,000 for a patent on a new laser printer. Although it gives legal protection years, the patent is expected to provide a competitive advantage for only eight years. Plant Assets, Natural Resour Requirements 1. Assuming the straight-line method of amortization, make journal entries to record (a) the purchase of the patent and (b) amortization for the first full year. 2. After using the patent for four years, MP learns at an industry trade show that another company is designing a more efficient printer. On the basis of this new information, MP decides, starting with Year 5, to amortize the remaining cost of the patent over two remaining years, giving the patent a total useful life of six years. Record amortization for Year 5.

Explanation / Answer

Req 1: Cost of Patents 200,000 Usefule life: 8 years Annual Amortization (200,000 / 8 years) 25000 Journal entries: S.no. Accounts title and explanations Debit $ Credit $ 1 Patents rights Dr. 200,000       Cash Account 200,000 2 Amortization Expense Dr. 25000       Accumulated Amortization-Patents 25000 Req 2 Accumulated amortization till year-4 (25000*4): 100,000 Remaining Cost to be amortized (i.e. 200,000 -100,000) 100,000 Revised revised remaining life (6 years-4 years) 2 years Amortization expense for Year-5 : Remaining cost / Remaining life = 100,000 / 2 years = $ 50,000 Amortization Expense Dr. 50000       Accumulated Amortization-Patents 50000

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