Question

several years ago ys purchased a patent i. a production process for 250000 and has amortized 91000 of thr cost ys has learned that a rical ckmpany recently developed a new provess that rebders the patent worthless. Consequently ys made a public announcement that it would no longer enforce the patent. What is the tax consequences to ya of this unfortunate situation

Answer 1

Note-

A patent is considered an intangible asset; this is because a patent does not have physical substance, and provides long-term value to the owning entity. As such, the accounting for a patent is the same as for any other intangible fixed asset, which is:

• Initial recordation. Record the cost to acquire the patent as the initial asset cost. If a company files for a patent application, this cost will include the registration, documentation, and other legal fees associated with the application. If the company instead bought a patent from another party, the purchase price is the initial asset cost.

• Amortization. The owner of the patent gradually charges the cost of the patent to expense over the useful life of the patent, usually using the straight-line amortization method.

• Impairment. If a patent no longer provides value, or a reduced level of value, recognize an impairment to reduce or eliminate the carrying amount of the asset.

• Derecognition. Once the company is no longer making use of the patented idea, the asset can be derecognized by crediting the balance in the patent asset account and debiting the balance in the accumulated amortization account. If the asset has not been fully amortized at the time of derecognition, then any remaining unamortized balance must be recorded as a loss.

in the given case,

Cost of the patent=250000

Total Amortaisation =91000

Carrying amount = 250000-91000 =159000

As the company is no longer going to use the patent , hence it should be derecognised.

Journal entry will be-

	Debit	Credit
Loss on Dereognisation of asset Dr	159000
To Intangible Asset(Patent)		159000
(Being Patenet is dereognised)

The loss of 159000 will reduce the profit of the year and hence thae tax also. It is an deductible expenses from the Tax prospective

Savings in Tax = 159000 * tax rate