Question

Holze Musis Company purchased for $600,000 a patent for a new sound system. Although it gives legal protection for 20 years, the patent is expected to provide the company with a competitive advantage for only six years. Make journal entires to record (a) the purchase of the patent and (b) amortization for year 1.

After using the patent for two years, Holze Music Company's research director learns at a professional meeting that BOSE is designing a more powerful system. On the basis of this new information, Holze Music Company determines that the patent's total useful life is only four years. Record amortization for year 3.

Answer 1

a
	Debit	Credit
Patents	600000
Cash		600000
b
Amortization expense	100000		=600000/6
Patents		100000
c
Amortization expense	200000
Patents		200000
Workings:
Patents cost	600000
Less: Amortization for 2 years	200000
Patent carrying value at end of Year 2	400000
Remaining useful life in years	2
Amortization for year 3	200000