Q9-5TI - Horngren'S Financial And Managerial Accounting

Question

^{Question:  On January 1, Orange Manufacturing paid $40,000 for a patent. Although it gives legal protection for 20 years, the patent is expected to provide a competitive advantage for only eight years. Assuming the straight-line method of amortization, record the journal entry for amortization for Year 1.}

Step-by-Step Solution

Answer

Answer

Amortization expense is debited by $5,000, and the Patent is also credited by $5,000.

Step 1: Showing Journal Entry for amortization for Year 1

Date	Accounts	Debit ($)	Credit ($)
	Amortization Expense-Patent	5,000
	Patent		5,000

Step 2: Calculation of Amortization expense

$$\begin{gathered} A mortisation on expense=\frac{\left(C\mathrm{os}t Residual Value\right)}{Useful life} \\ =\frac{\left(\$40,000-\$0\right)}{8year} \\ =\$5,000 per year \end{gathered}$$

A patent is an intangible asset, and most intangible assets have zero residual value.