Final answer:
The amortization expense for Kleen Company's patent for Year 4 is $118,912.50. This includes the additional legal defense cost that has been capitalized and is being amortized over the remaining life of the patent. The associated journal entry records a debit to Patent Amortization Expense and a credit to Patents for the amount of the annual amortization expense.
Step-by-step explanation:
Kleen Company acquired a patent and needs to calculate the amortization expense for Year 4, including the costs it incurred from defending it in a lawsuit. The original cost of the patent was $857,700 with a useful life of eight years. Since the patent was defended successfully in a lawsuit, an additional cost of $36,000 is added to the patent's book value for amortization purposes.
To calculate the amortization expense for Year 4:
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- First, add the legal defense cost to the patent's book value:
$857,700 + $36,000 = $893,700.
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- Amortize the adjusted book value over the remaining life of the patent. January 10 of Year 4 marks the beginning of the fourth year, so after three years of amortization, there are five years remaining:
$893,700 / 8 original years = $111,712.50 original annual amortization
$36,000 / 5 remaining years = $7,200 additional annual amortization
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- Combine the original and additional amortization expenses for the total annual amount:
$111,712.50 + $7,200 = $118,912.50
The journal entry on December 31 of Year 4 to record the patent amortization would be:
Debit: Patent Amortization Expense $118,912.50
Credit: Patents $118,912.50
note that the number used for denominating years remaining and original years denotes looking at the patent useful life from the point of year one and year four respectively when calculating the annual amortization for both the initial cost and the additional legal defense cost.