Question

Blue Co. has a patent on a communication process. The company has amortized the patent on a straight-line basis since 2017 when it was acquired at a cost of $55 million at the beginning of the year. Due to rapid technological advances in the industry, management decided that the patent would benefit the company over a total of six years rather than the nine-year life being used to amortize its cost. The decision was made at the end of 2021 ( before adjusting and closing entries). What is the appropriate patent amortization expense in 2021?

Answer 1

$15.28 million

Explanation:

Annual Amortization Expense:

= Cost of acquiring at the beginning of the year ÷ 9-year life

= $55 million ÷ 9

= $6.11 million per year

Year 2021 Amortization Expense 4 Years:  

= Annual Amortization Expense × 4

= $6.11 per year × 4 years

= $24.44 million

Unamortized Cost:

= Cost of acquiring at the beginning of the year - Amortization Expense 4 Years

= $55 million - $24.44 million

= $30.56 million

Patent amortization expense in 2021:

= Unamortized Cost ÷ 2

= 30.56 ÷ 2

= $15.28 million