Question

On January 1, Year 1, Lowing Company acquired a patent from Generics Research Corporation for $3 million. The legal life of the patent is 20 years, but Lowing expects to use it for 5 years. Pawson Company has committed to purchase the patent from Lowing for $500,000 at the end of that 5-year period. Lowing uses the straight-line method to amortize intangible assets with finite useful lives. What is the amount of amortization expense each year?

Requirements:
Amortization Expense________________
Note: the amount 25,000,000 is wrong
Knowledge Check 01

Answer 1

The amount of amortization expense each year is $500,000.

Step-by-step explanation:

This can be calculated as follows:

Patent original cost = $3,000,000

Salvage value after 5 years = $500,000

Number of years to use before selling it = 5 years

Therefore, we have:

Annual amortization expense = (Patent original cost - Salvage value after 5 years) / Number of years to use before selling it = ($3,000,000 - $500,000) / 5 = $500,000

Therefore, the amount of amortization expense each year is $500,000.