Question

Patton rights were acquired on January 2, 2002 for $855,000. The remaining legal life is 15 years and the estimated economic life is 12 years. On January 6, 2004, the company successfully defeated the patent in a lawsuit at a cost of $32,000.

A) illustrate the effects on the financial statements of the patent amortization for the year and December 31, 2002

b) illustrate the effects on the financial statement of a legal cost incurred on January 6, 2004

c) illustrate the effect on the financial statement of the patent amortization for the year and December 31, 2004

Answer 1

All amouny are in $

(A)

Cost = 855,000

On Jan 2, 2002

Patent 855,000

Cash 855,000

(Patent acquired)

On December 31, 2002

Amortization Expense 71,250

Patent/Accumulated Amortization 71,250

(Amortization of patent for 2002 accounted)

Amortization Expense = 855,000/12 = 71,250

(B)

Legal costs incurred on defending the patent. The accounting will depend on whether the defence of patent is successful or not. If it is successful then these costs are capitalized, if not successful then the costs are treated as expense.

Patent 32,000

Cash 32,000

(C)

Amortization Expense 74,450

Patent/Accumulated Amortization 74,450

(Amortization Expense for the year 2004 accounted)

Working :

Patent revised balance = 855,000 - 71,250 - 71,250 + 32,000

= 744,500

(Depreciation of two years is reduced and legal cost is added)

Amortization Expense = 744,500/10= 74,450