Question

on january 1, 2024, a company purchased a patent for $276,000 giving it exclusive rights to manufacture a new type of synthetic clothing. while the patent had a remaining legal life of 15 years at the time of purchase, the company expects the useful life to be only eight more years. in addition, the company purchased equipment relate to production of the new clothing for $144,000. the equipment has a physical life of 10 years, but the company plans to use the equipment ony over the patent's service life and then sell it for an estimated $32,000. the company uses straight-line for all long-term assets. the amount to expense in 2027 related to the patent and equipment should be:

Answer 1

In 2027, the amount to expense related to the patent and equipment using straight-line amortization and depreciation methods would be $48,500. This is calculated as $34,500 for the patent amortization and $14,000 for the equipment depreciation.

Step-by-step explanation:

When a company purchases a patent, it is capitalized as an intangible asset on the balance sheet and then amortized over its useful life. In this scenario, the company purchased a patent for $276,000 with a remaining legal life of 15 years but only anticipates using it for 8 years. Therefore, the annual amortization expense for the patent would be $276,000 ÷ 8 years, which equals $34,500 per year.

Similarly, when equipment is purchased, it is capitalized and then depreciated over its useful life. The company purchased equipment for $144,000 and expects to use it over the 8-year life of the patent, with a residual value of $32,000. Therefore, the annual depreciation expense for the equipment would be ($144,000 - $32,000) ÷ 8 years, which equals $14,000 per year.

In 2027, the combined expense related to the patent and equipment would be the sum of the annual amortization of the patent and the annual depreciation of the equipment. This yields $34,500 (patent) + $14,000 (equipment) = $48,500.