Question

Digger Corp has a patent that was purchased on 1/1/17 for $30,000. The patent has a 15-year useful life, no salvage value, and has been appropriately amortized at $2,000 a year for the past 3 years.   On 1/1/20, Digger incurred $15,600 in legal fees to successfully defend the patent. If Digger estimate of patent's useful life and salvage value have not changed, how much amortization expense should Digger record for the patent in 2020?

Select one:

$2,640

$3,800

$3,040

$3,300

Answer 1

Answer)

In the given question the patent was purchased for $ 30,000 on 1/1/17 and had a useful life of 15 years. Therefore annual amortization expense will be $ 2,000 (i.e. $ 30,000/15 years).

The patent is amortized for 3 years (i.e. from 1/1/17 to 31/12/19). The carrying cost of patent on 31/12/19 will be $ 24,000 (i.e. $ 30,000 - $ 2,000 X 3 years).

Next on 1/1/20, legal fees incurred of $ 15,600 will be added to the carrying cost (Unamortized Value of patent) as on 1/1/20 (i.e. $ 24,000) as the patent was success defended and will be amortized over the remaining useful life of the patent (i.e. 12 years).

Amortization expense for the year 2020 = (Carrying cost as on 1/1/20 + Legal expenses incurred on defending the patent on 1/1/20)/ Balance number of year of useful life of the patent

                                                                = ($ 24,000 + $ 15,600)/ 12 years

                                                                = $ 3,300

Therefore amortization expense for the year 2020 will be $ 3,300.