Question

Sage Hill Industries had one patent recorded on its books as of January 1,2025 . This patent had a book value of $403,200 and a remaining useful life of 8 years. During 2025 , Sage Hill incurred research and development costs of $96,000 and brought a patent infringement suit against a competitor. On December 1, 2025, Sage Hill received the good news that its patent was valid and that its competitor could not use the process Sage Hill had patented. The company incurred $93,500 to defend this patent. At what amount should patent(s) be reported on the December 31,2025 , balance sheet, assuming monthly amortization of patents? The amount to be reported $___

Answer 1

Sage Hill Industries will report the patents on the balance sheet on December 31, 2025, at $446,300, after accounting for annual amortization of $50,400 and capitalizing legal costs of $93,500 incurred to defend the patent.

Step-by-step explanation:

Sage Hill Industries needs to determine the value at which to report its patent(s) on the balance sheet as of December 31, 2025. To find the correct amount, we need to account for the amortization of the existing patent and the legal costs incurred to defend the patent.

Amortization of the patent is calculated by dividing its book value by its remaining useful life. The book value of the patent as of January 1, 2025, is $403,200 and it has 8 years of remaining useful life. Therefore, the annual amortization is $403,200 / 8 = $50,400. Since we are calculating monthly amortization and we have 12 months in a year, the monthly amortization is $50,400 / 12 = $4,200. For the year 2025, this results in an amortized value of $4,200 * 12 = $50,400.

While research and development costs are expensed as incurred and do not affect the value of the patent on the balance sheet, legal costs to successfully defend a patent are capitalized. Thus, Sage Hill should add the $93,500 incurred to defend the patent to the patent's book value, but since they occurred on December 1, there is no amortization needed for these costs within the same month.

Adjusting for the amortization expense for the year but before accounting for the legal costs results in a book value of $403,200 - $50,400 = $352,800. Then, adding the legal costs gives the final book value of the patent: $352,800 + $93,500 = $446,300.

As such, on December 31, 2025, the patent(s) should be reported on the balance sheet at $446,300.