Question

Harmax Limited spent $5,000 registering an internally developed patent and then another $20,000 defending and enforcing the patent in its first year. How should the patent be reflected in the financial statements?

Answer 1

Harmax Limited's $5,000 patent registration cost is capitalized on the balance sheet, while the $20,000 defense cost is expensed in the income statement. Capitalized costs are amortized over the legal life of the patent.

Step-by-step explanation:

Harmax Limited has incurred costs related to the registration and defense of an internally developed patent. In financial statements, the $5,000 registration cost would be capitalized as an intangible asset, representing the cost to obtain the patent. However, the $20,000 defense and enforcement cost in the patent's first year is generally expensed as it occurs. The subsequent amortization of the capitalized registration cost would occur over its useful life, often the legal life of the patent, which is 20 years. This would be reflected on the balance sheet as an intangible asset and gradually expensed on the income statement through amortization expenses.

Patents are critical to companies like Harmax Limited as they provide an incentive to innovate by protecting the intellectual property, which can significantly improve a company's competitive edge and potential for profit. Yet, factors such as technological advances in high-technology industries can affect the relevance and economic value of patents over time.