Q12SE - Horngren'S Financial And Managerial Accounting

Question

Accounting for an intangible asset On October 1, 2018, Modern Company purchased a patent for $153,600 cash. Although the patent gives legal protection for 20 years, the patent is expected to be used for only eight years.

 Requirements 

1. Journalize the purchase of the patent. 

2. Journalize the amortization expense for the year ended December 31, 2018. Assume straight-line amortization.

Step-by-Step Solution

Answer

Amortization expenses of the patent for the year 2018 are equal to $4,800.

Step 1: Definition of Intangible Asset

The assets that increase the value of the business organization even without having any physical existence are known as intangible assets. Goodwill and patents are some of the intangible assets. 

Step 2: Journalize the purchase of the Patent as follows

Date	Particulars	Debit ($)	Credit ($)
1 Oct 2018	Patent	153,600
	Cash		153,600
	(To record purchase of Patent)

Step 3: Journal entry for amortization expenses

Date	Particulars	Debit ($)	Credit ($)
31 Dec 2018	Amortization expenses – Patent	4,800
	Patent		4,800
	(To record the amortization expenses)

Working note: Calculation of amortization expenses

 

$\begin{array}{c}\mathrm{Amortization} \mathrm{expenses}=\frac{\mathrm{Cost}}{\mathrm{Useful} \mathrm{life}}\times \frac{3}{12}\\ =\frac{\mathrm{\$}153,600}{8}\times \frac{3}{12}\\ =\mathrm{\$}4,800\end{array}$