Amortization on Patent (MCQ)

  • This topic has 1 reply, 2 voices, and was last updated 8 years ago by Me!.
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  • #1584520
    ab29
    Participant

    Can someone dumb down the answer to the following question. I answered $54,000, but the correct answer is $63,000.

    On January 2, year 1, Lava, Inc. purchased a patent for a new consumer product for $90,000. At the time of purchase, the patent was valid for fifteen years; however, the patent’s useful life was estimated to be only ten years due to the competitive nature of the product. On December 31, year 4, the product was permanently withdrawn from sale under governmental order because of a potential health hazard in the product. What amount should Lava charge against income during year 4, assuming amortization is recorded at the end of each year?

    Answer: $63,000

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  • #1584544
    Me!
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    The useful life at the purchase date was 10 years which is used rather than the remaining 15 years. $90,000/10=$9,000 per year. Three years had lapsed and 3 years of amortization had been charged. 3 x 9,000 = 27,000. at December 31, year 4 the patent was withdrawn. The remaining unamortized amount would be $90,000-$27,000=$63,000.

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