Question

Dennis Manufacturing purchased a patent for a bicycle. The patent had a remaining legal life of 3 years, but Dennis thought the bike would be popular for 20 years, so they amortized the cost of the patent over 20 years. How will this affect the accuracy of Dennis Manufacturing’s financial statements?

Answer 1

Net income and assets will be overstated

Step-by-step explanation:

Financial statements are used by businesses to show the financial position within a given time frame

The various types of financial statements are income statement, cash flow statement, and the balance sheet.

In the given scenario Dennis manufacturing was supposed to pay for the patent of the bicycle for 3 remaining years of it's useful life.

However they intend to amortize the payments over 20 years.

Since financial statements are usually annual or less this will overstate net income and assets.

Yearly expense incurred for payment of the patent will be reduced annually.

Also the value of the patent will be overstated since yearly deduction for the asset will be less than it should be