Question

You have been examining the books of a new client. Included on their previously unaudited financial statements was a balance of $299,032 for a long-term Patent as of 12/31/2017. When examining the ledger, you found these entries:

• An “acquisition” entry of $274,982:
• Legal costs incurred in the preparation of the application for the patent: $6,450 during 2016
• Leal costs incurred in successfully defending the validity of the patent: $17,600 during 2017

Answer 1

Solution:

Long Term Patent:

There are two types of Patent. Patent with definite life and the other Patent with indefinite life. The Patent with indefinite life is called as long term Patent. We amortize every year only the patent that has the definite life and the Patent with indefinite life will not be amortized. Amortization of Patent is the allocation of the cost of the intangible asset to expense over its useful life. Long term Patents are tested every year for impairment. Impairment means is when the company test the book value of the Patent and realize that the value of the Patent is not worth as mentioned (Fair Value is less than the Book Value). If there is an impairment, then the company will record a loss. The value of the Patent is reduced and the loss is adjusted to the retained earnings of the company.

Valuation of the Long Term Patent:

When the Patent is acquired, it will be recorded at the Cost incurred to acquire the Patent. The cost includes all the expenses incurred to make the Patent ready for the purposes it is acquired. There it includes the cost of Purchase, any legal fees paid, and other expenses incurred in acquiring the Patent.

In the given Scenario when valuing the Long Term Patent we capitalize the the Patent acquisition cost and all the legal expense incurred to have the Patent ready for the intended use.

Cost of the Patent:

But the value of the Patent shows as $ 299,032 because the legal expense of $ 6,450 is recorded twice in the books. We need to do a reversing entry to rectify the error or undo the mistake. Reversing entry can be passed only in next accounting period (i.e. 2018). To undo the incorrect entry passed we just flip the incorrect entry passed. Flip entry is also known as reverse entry. Value of the Patent will be revalued @ $ 292,582.