Question

Granite Enterprises acquired a patent from Southern Research Corporation on January 1, 2021, for $4 million. The patent will be used for five years, even though its legal life is 20 years. Rocky Corporation has made a commitment to purchase the patent from Granite for $200,000 at the end of five years. Compute Granite's patent amortization for 2021, assuming the straight-line method is used.

Answer 1

$3,800,000

Step-by-step explanation:

The computation of amortization is shown below:-

Purchase commitment of $200,000 is treated as the residual value of the patent

Amortization = Acquired vale of patent - the residual value of the patent

= $4,000,000 - $200,000

= $3,800,000

Therefore for computing the amortization we simply subtract the residual value of the patent from an acquired value of patent.