Question

Cello Corporation purchased three patents at a total cost of $960,000. The appraised values of the individual patents were as follows:

Patent 1 $600,000
Patent 2 400,000
Patent 3 200,000
The costs that should be assigned to Patents 1, 2, and 3, respectively, are:
a) $320,000; $320,000; $320,000.
b) $480,000; $320,000; $160,000.
c) $600,000; $400,000; $200,000.

Answer 1

Costs for Cello Corporation's patents should be allocated based on their appraised values' proportion of the total appraised value. Patent 1 would be assigned $480,000, Patent 2 $320,000, and Patent 3 $160,000, respectively.

Step-by-step explanation:

When allocating costs to assets purchased as a group, such as patents, it is common to use the relative fair market values of each asset to divide up the total cost. In this case, Cello Corporation purchased three patents for a total of $960,000, with individual appraised values at $600,000, $400,000, and $200,000 for Patents 1, 2, and 3, respectively.

To assign the costs to each patent, we add up the total appraised value ($600,000 + $400,000 + $200,000 = $1,200,000) and then calculate the percentage of the total appraised value that each patent represents. These percentages are then applied to the total purchase cost of $960,000.

For example, Patent 1 ($600,000 / $1,200,000) represents 50% of the total appraised value. Applying this percentage to the total purchase cost gives Patent 1 a cost of (50% x $960,000) = $480,000. Repeat this process for Patents 2 and 3 to find their respective costs.