Q25E - Horngren'S Financial And Managerial Accounting

Question

Handling acquisition of patent, amortization, and change in useful life Melbourn Printers (MP) manufactures printers. Assume that MP recently paid $200,000 for a patent on a new laser printer. Although it gives legal protection for 20 years, the patent is expected to provide a competitive advantage for only eight years

 Requirements

 1. Assuming the straight-line method of amortization, make journal entries to record

 (a) The purchase of the patent and

 (b) Amortization for the first full year. 

2. After using the patent for four years, MP learns at an industry trade show that another company is designing a more efficient printer. On the basis of this new information, MP decides, starting with Year 5, to amortize the remaining cost of the patent over two remaining years, giving the patent a total useful life of six years. Record amortization for Year 5.

Step-by-Step Solution

Answer

Amortization expense by the straight-line method is $25,000

Amortization expense for year 5 is $50,000.

Step 1: Meaning of Amortization

Amortization is known as the method of allocating or spreading the expenses incurred for an intangible asset over its useful life. Amortization expenses reduce the value of the intangibles.

Step 2: Showing journal entries of requirement 1

Date	Particulars	Debit ($)	Credit ($)
	Patent	200,000
	Cash		200,000
	(To record purchase of Patent)
	Amortization Expenses- Patent	25,000
	Patent ( To record amortization of Patent )		25,000

Working note: Calculation of amortization using straight line method

$\begin{array}{rcl}Amortization expense& =& \frac{(Cost-Residualvalue)}{Useful life}\\ & =& \frac{\$200,000-\$0}{8}\\ & =& \$25,000\end{array}$

For most of the intangible assets the residual value is Zero.

Step 3: Showing journal entry on Amortization of Patent for year 5 (requirement 2)

Date	Particulars	Debit ($)	Credit ($)
31st Dec	Amortization expenses-Patent	50,000
	Patent		50,000
	( To record amortization of patent )

Working note: Calculating the amortization expense for year 5th.

$\begin{array}{rcl}Cost of amortization till four years& =& \$25,000\times 4\\ & =& \$100,000\\ dBook valurat the beginning of 5th year& =& \$200,000-\$1,00,000\\ & =& \$100,00\\ Amortization ezpense for year 5 and 6& =& \frac{\$100,000}{2}\\ & =& \$50,000\end{array}$