Question

At the beginning of the year, a company purchases a patent for $2,400,000. The remaining legal life of the patent is 12 years, but management estimates that the patent will generate additional revenue for the next 16 years because there are currently no known competitors. At the end of the first year, management calculates straight-line amortization to be $150,000 ($2,400,000 / 16 years). Which of the following statements is correct?

A) The straight-line amortization method is not appropriate for this situation.
B) The patent's amortization should be $150,000 for each of the remaining 16 years.
C) The patent's amortization should be $200,000 for each of the remaining 12 years.
D) The patent's amortization should be $150,000 for each of the remaining 12 years.

Answer 1

The correct statement is that the patent's amortization should be $150,000 for each of the remaining 12 years.

Step-by-step explanation:

The correct statement is D) The patent's amortization should be $150,000 for each of the remaining 12 years.

Amortization is the process of spreading the cost of an intangible asset over its useful life. In this case, the company purchased a patent for $2,400,000 which has a remaining legal life of 12 years. However, management estimates that the patent will generate additional revenue for the next 16 years.

The straight-line amortization method is used to allocate the cost of the patent evenly over its useful life. Therefore, management calculates straight-line amortization to be $150,000 per year ($2,400,000 / 16 years) at the end of the first year.

Since the useful life of the patent is 12 years, the correct statement is that the patent's amortization should be $150,000 for each of the remaining 12 years. This ensures that the total cost of the patent is allocated over its entire useful life.