On January 2, 2018, David Corporation purchased a patent for $420,000. The remai

Question

On January 2, 2018, David Corporation purchased a patent for $420,000. The remaining legal life is 12 years, but the company estimated that the patent will be useful only for eight years. In January 2020, the company incurred legal fees of $45,000 in successfully defending a patent infringement suit. The successful defense did not change the company’s estimate of useful life. Required: Prepare journal entries related to the patent for 2018, 2019, and 2020. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Record the purchase of the patent.

Record amortization of the patent for the year 2018.

Record amortization of the patent for the year 2019.

Record costs of successfully defending the patent infringement suit.

Record amortization of the patent for the year 2020.

Explanation / Answer

Journal entries:

Working Notes:

Amortization amount is calculated as: Cost of Patent / Useful life of the patent

If both legal life and useful life are given , lower of the two should be taken to calculate amortization amount. Here, 8 years is a shorter period. So it should be considered.

Required amount = 420,000 / 8 = $52,500

Amortization amount for the year 2020 = Carry down value of patent + Legal fees / Remaining useful life

Carry down value = 420,000 - 52,500 - 52,500 = $315,000

Remaining Useful life = (8-2) = 6 years

Amount for 2020 = 315,000 + 45,000 / 6 = 360,000 / 6 = $60,000

DATE TRANSACTION DESCRIPTION DEBIT($) CREDIT($) Jan 2018 Patent 420,000 Cash 420,000 Dec 2018 Amortization Expense 52,500 Patent 52,500 Dec 2019 Amortization Expense 52,500 Patent 52,500 Jan 2020 Legal expenses on Patent 45,000 Cash 45,000 Dec 2020 Amortization Expense 60,000 Patent 60,000 *-------------------------------------------------*

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