Question

On January 1, 2012, Hess Co. purchased a patent for $952,000. The patent is being amortized over its remaining legal life of 15 years expiring on January 1, 2027. During 2015, Hess determined that the economic benefits of the patent would not last longer than ten years from the date of acquisition. What amount should be reported in the balance sheet for the patent, net of accumulated amortization, at December 31, 2015?

1) $571,200
2) $652,800
3) $672,000
4) $698,200

Answer 1

The net book value of the patent on the balance sheet at December 31, 2015, considering the change in its estimated useful life, would be $652,800. This figure includes initial amortization for three years and the revised amortization for 2015 after adjusting the useful life to 10 years.

Step-by-step explanation:

When Hess Co. purchased the patent for $952,000 with an initial life of 15 years, annual amortization would be calculated as $952,000 / 15 years = $63,466.67. By 2015, three years of amortization have already been recorded, so the accumulated amortization at the start of the year would be $63,466.67 x 3 = $190,400. When Hess Co. revised the useful life to 10 years in 2015, the remaining cost to be amortized over the remaining 7 years would be $952,000 - $190,400 = $761,600. The new annual amortization expense would then be $761,600 / 7 = $108,800. Since the revision was made in 2015, for that year alone, we would record this revised expense. Therefore, the accumulated amortization at the end of 2015 would be $190,400 (initial three years) + $108,800 (for 2015) = $299,200. Consequently, the patent's net book value on December 31, 2015, would be the initial cost of $952,000 less the accumulated amortization of $299,200, resulting in $652,800.