Question

Objective: Knowledge of the FASB Codification and to practice communicating the results of the research in “clear, complete and professional” manner.

Scenario: 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 12/31/2016. When examining the ledger, you found these entries, in addition to the “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

There have been no amortization expenses reported for the patent. In discussions with the president of the firm, you learned that this patent was developed by an employee specifically hired to work on the development of the president’s initial concept for the product. After 3 years of work, the patent was granted at the end of 2016. The patented product has resulted in a 50% increase in sales from 12/31/2016 to 12/31/2018. The president expects the product to continue being very marketable over the company’s 3 year strategic plan from 2017 through 2020.

Instructions: As the outside auditor for the company, prepare a memo as of 12/31/2018 to the president of the company discussing: 1. The GAAP rules governing the accounting of patents, using appropriate citations from the codification. (Provide the appropriate references to the FASB Codification. Do NOT copy and paste the codification sections.) 2. The previous mistakes in accounting for the patent. Suggest correcting journal entries, if appropriate.

Answer 1

Current GAAP does not specifically address the accounting for implementation costs of a hosting arrangement that is a service contract. Accordingly, the amendments in this Update improve current GAAP because they clarify that accounting and align the accounting for implementation costs for hosting arrangements, regardless of whether they convey a license to the Softwares.

Hosting Arrangement

In connection with accessing and using software products, an arrangement in the customer of the software does not currently have possession of the software; rather, the customer accesses and uses the software on an as-needed basis.

Company A can also capitalize external legal costs incurred in the defense of its patents when it is believed that the future economic benefit of the patent will be increased and a successful defense is probable. Capitalized patent defense costs are amortized over the remaining life of the related patent. In the Present Case Legal costs incurred in successfully defending the validity of the patent: $17,600 during 2017 which should be capitalized even after the development of Patents as a future economic benefit of the patent will be increased.

Patents Cost should be amortized in the period in the useful life of the patent. In the present case, the

useful life of the patent is 4 years 12/31/2016 to 12/31/2020.

Please find the screenshot for the entries.