Question

On January 2, year 1, Lava, Inc. purchased a patent for a new consumer product for $90,000. At the time of purchase, the patent was valid for fifteen years; however, the patent's useful life was estimated to be only ten years due to the competitive nature of the product. On December 31, year 4, the product was permanently withdrawn from sale under governmental order because of a potential health hazard in the product. What amount should Lava charge against income during year 4, assuming amortization is recorded at the end of each year

Answer 1

The amount Lava should charge against income during year 4 is $63,000.

Step-by-step explanation:

Since amortization is assumed to be recorded at the end of each year, this can be calculated as follows:

Annual amortization expense = Cost of the patent / Patent's estimated useful life = $90,000 / 10 = $9,000

Amortization expense recorded prior to year 4 = Annual amortization expense * 3 years = $9,000 * 3 = $27,000

Unamortized cost of patent charge against income during year 4 = Cost of the patent - Amortization expense recorded prior to year 4 = $90,000 - $27,000 = $63,000

Therefore, the amount Lava should charge against income during year 4 is $63,000.