Question

computing subsequent carrying amount of patents in january of year 1, ford co. purchased a patent from a research institution for $250,000. the patent was estimated to have a useful life of 15 years. in december of year 2, ford co. defended the patent in legal proceedings and successfully retained rights of ownership of the patent. the estimated life of the patent did not change from its original estimate. legal expenses on december 31 were $20,000. determine the (1) amortization for year 2, and (2) carrying value of the patent on december 31 of year 2. note: round your final answers to the nearest dollar. 1. amortization for year 2 answer 2. carrying value on dec. 31, year 2 answer

Answer 1

The amortization for year 2 of the patent is $16,667, and the carrying value on December 31 of year 2, after adding legal expenses and subtracting accumulated amortization, is $236,666.

Step-by-step explanation:

When calculating the subsequent carrying amount of patents, amortization over the useful life of the asset and additional costs from activities such as legal defense of the patent must be considered. For Ford Co.'s patent, purchased for $250,000 with a 15-year useful life, the annual amortization expense would be $250,000 / 15 = $16,667. In year 2, the full annual amortization expense is recognized. Additionally, the $20,000 in legal expenses to defend the patent in December of year 2 should not be expensed but rather capitalized, as it extends the useful life and benefits of the patent.

1. The amortization for year 2 is $16,667.
2. The carrying value of the patent on December 31, year 2, is the original cost minus two years of amortization plus the legal expenses, which calculates to $250,000 - ($16,667 × 2) + $20,000 = $236,666 (rounded to the nearest dollar).