Question

Alatorre purchased a patent from Vania Co. for $1,000,000 on January 1, 2018. The patent is being amortized over its remaining legal life of 10 years, expiring on January 1, 2028. During 2020, Alatorre determined that the economic benefits of the patent would not last longer than 6 years from the date of acquisition. What amount should be reported in the balance sheet for the patent, net of accumulated amortization, at December 31, 2020?

Answer 1

$600,000

Step-by-step explanation:

Patent is an intangible non current asset that may be amortized over the estimated useful life.

Given that Alatorre purchased a patent from Vania Co. for $1,000,000 on January 1, 2018 and the patent had a remaining legal life of 10 years, expiring on January 1, 2028

Annual amortization expense = $1,000,000/10 = $100,000

During 2020 ( the patent would have been amortized for 2 years), the accumulated amortization

= 2 × $100,000

= $200,000

The net book value then

= $1,000,000 - $200,000

= $800,000

If the economic benefits of the patent would not last longer than 6 years from the date of acquisition, it means it has a remaining useful life of 4 year from 2020.

Amortization for 2020 = $800,000/4 = $200,000

The amount of the patent net of net of accumulated amortization, at December 31, 2020

= $800,000 - $200,000

= $600,000