Scorpion Industries had one patent recorded on its books as of January 1, 2018. This patent...

Scorpion Industries had one patent recorded on its books as of January 1, 2018. This patent had a book value of $210,000 and a remaining useful life of 7 years. During 2018, Scorpion brought a patent infringement suit against a competitor. On October 1, 2018, Scorpion received the goods news that its patent was valid and that its competitor could not use the process Scorpion had patented. The company incurred $90,000 to defend this carrying value of the patent. Compute the patent that would be reported on the December 31, 2018, balance sheet, assuming monthly amortization of carrying value of the patents.

Expert Solution

In case of amortization of patents, It's value is divided among it's useful life equally and deducted on monthly or annual basis so that by the end of it's useful life , it's value will be $0
In the given case Book value of patent = $210000
Useful life = 7 years or 84 months (because in this case, amortization is done on monthly basis)
Therefore value of patent to be amortized or written off on monthly basis would be $2500 ( $210000/ 84 months)

Now if some legal additional expenses are incurred in favor of patent which enables us it's continuous use for remaining useful life that such legal expenses are capitalized and added to the remaining value of patent. Than that value of patent is amortized equally for the remaining life of patent
In the given case, Suit is won and legal expenses paid= $90000
Date when suit is won = October 01,2018
Written down value of patent on October 01, 2018 = $187500 ($210000- $2500 for 9 months from January to September 2018= $22500)
New value of patent including legal expenses = $277500 ($187500 + $90000)
Remaining useful life of patent = 75 months (84 total months - 9 months for January to September 2018)
Therefore value of patent to be amortized or written off on monthly basis from October 2018 onward = $3700 ( $277500 / 75 remaining months)

Hence patent that would be reported on December 31, 2018 = $266400 [Opening value ($210000)- amortization for 9 months ($2500 for first 9 months) + Legal expenses ($90000) - new amortization for remaining 3 months of 2018 ($3700 for last 3 months)

ekkarill92 answered 4 months ago

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