Question

Andy Ltd acquired a patent for $20,000 on 31 September 2015. The patent is for a period of 20 years and it is estimated that its useful life will be 10 years. What journal entry is required on 31 December 2015, the end of Andy Ltd's financial year?

Select one:
a. Dr Amortisation Expense-patent $500, Credit Accumulated Amortisation-patent $500.
b. Dr Amortisation Expense-patent $1,000, Credit Accumulated Amortisation-patent $1,000.
c. Dr Amortisation Expense-patent $250, Credit Accumulated Amortisation-patent $250.
d. Dr Amortisation Expense-patent $2,000, Credit Accumulated Amortisation-patent $2,000.

Answer 1

The correct journal entry for the amortization of a patent on 31 December 2015 is a debit to Amortisation Expense-patent and a credit to Accumulated Amortisation-patent for $500, representing three months of expense for that year.

Step-by-step explanation:

The journal entry required on 31 December 2015 for the amortization of the patent acquired by Andy Ltd is based on the estimated useful life of the patent. Since the patent was acquired for $20,000 and has a useful life of 10 years, the annual amortization expense is $2,000 ($20,000 ÷ 10 years).

As the patent was acquired on 31 September 2015, only three months of amortization should be recorded by 31 December 2015. Therefore, the amortization expense for three months is $500 ($2,000 ÷ 4 quarters). The correct journal entry is: Dr Amortisation Expense-patent $500, Credit Accumulated Amortisation-patent $500.