Question

On January 1, 2019, Company X has a license it acquired in a business

combination that currently has a carrying value of $40,000. The license can be

renewed every 20 years for little cost. Company X's intent is to continually

renew the license. What amount is reported as amortization expense for 2019?

ii. During the first quarter of 2020, a legal issue arose related to the license and

Company X believes that the license may not generate the future revenues

expected. The fair value of the license is estimated at $5,000 and will not be

renewed when it expires in 5 years. What amount is reported on the Income

Statement for 2020 related to the license and what amount is reported on the

December 31, 2020 balance sheet? Prepare any necessary journal entries.

Answer 1

(i) Amortization expense

• Is a process of allocating an amount of expenses over the period of beneficial life.
• As we provide depreciation is on the fixed assets, whereas amortization is on the intangible asset.

In this case, company X has acquired a license cost of $40,000 and beneficial life of 20 years.

Amortization expenses = (Initial value - residual value) / Lifespan

= $40,000/20 years

= $2,000 amortization expenses for 2019

Journal entries will be:

(a) Purchase of license on January 1,2019 of $40,000

Particulars	Debit	Credit
License a/c Dr.	$40,000
To Cash a/c		$40,000
Being License purchased

(b) Amortization expense for 2019

Particulars	Debit	Credit
Amortization expense - License a/c Dr.	$2,000
License a/c		$2,000
Being License fees amortization for the year