Question

How do you journalize the following transaction: Smith company has on its books a Patent ($5000) which was purchased on March 9, 2017 from a competitor. The patent has a remaining legal life of 8 years. Smith company assumes the patent will benefit the company for at least 12 years.

Answer 1

Journal entry for aquisition/ purchase of intangible asset:

March 9th 2017	Patent A/c	Dr	$5000
	To Cash A/c		$5000

(being patent acquired for cash)

The amortization period equals the shorter of the asset's useful life or its legal life.

Amortisation expense: 5000 / 8yrs = $ 625

Journal entry for amortistion of intangible asset:

March 31st 2017	Amortisation expense A/c	Dr	$625
	To Patent A/c		$625

(being patent amortised for the year 2017)

March 31st 2018	Amortisation expense A/c	Dr	$625
	To Patent A/c		$625

(being patent amortised for the year 2018)

Similarly we must pass journal entries for amortisation till end of legal expiration of patent.