Question

On January 1, Year 1, Sanders Company acquired a patent in conjunction with the purchase of another company. The patent, valued at $600,000, was estimated to have a 10-year life and no residual value. Sanders uses the straight-line method of amortization for intangible assets. The unamortized cost (balance in the Patent account) was $480,000 at December 31, Year 2. On January 5, Year 3, Sanders successfully defended its patent against infringement and paid cash of $40,000 for the related litigation costs. What is the amount of amortization expense that will be recorded for Year 3

Answer 1

The amortization expense = $520,000/8 years = $65,000

Step-by-step explanation:

To determine the Amortization expense, First we need to understand General Accepted Accounting Principles (GAAP) on Intangible Assets.

The principle is that the cost of a successful legal defense of a patent infringement or any other similar intangible asset should be capitalized or become part of the book value of the intangible asset.

As such, there is a need to recompute the book value of the asset as follows

$480,000 (unamortized balance) + $40,000 (cost of successful defense of the patent against infringement)

= $530,000.

The useful remaining is 8 years (year 1 and 2 gone and case occurred in years 3)

The amortization expense = $520,000/8 years = $65,000