Question

19. On June 30, 2016, Mobley Corporation acquired a patent for $4.10 million. The patent was estimated to have an eight-year life and no residual value. Mobley uses the straight-line method of amortization for intangible assets. At the beginning of January 2018, Mobley successfully defended its patent against infringement. Litigation costs totaled $660,000.

Required: 1. Calculate patent amortization for 2016 and 2017.

2. Prepare the journal entry to record the 2018 litigation costs.

3. Calculate amortization for 2018.

4-a. Prepare the journal entry to record the 2018 litigation costs and calculate amortization for 2018, assuming that Mobley prepares its financial statements according to International Financial Reporting Standards (IFRS).

4-b. Calculate amortization for 2018 under IFRS.

Answer 1

1	Calculation of Patent Amortization under straight line method:
	Cost of the patent = $ 4100000
	Useful Life = 8 years
	Residual value = Nil
	Patent Amortization per year under straight line method
	(Cost of the asset - Residual Life) / useful Life
	(4100000 - 0) / 8 = $512500
	Particulars	$
	Cost of the Patent as on June 30 2016	4100000
	Less: Patent Amortization for the year 2016	-256250
	Written down Value as on Jan 1' 2017	3843750
	Less: Patent Amortization for the year 2017	-512500
	Written down Value as on Jan 1' 2018	3331250
2	Under US GAAP, legal fees and other costs incurred in successfully defending a patent lawsuit can be capitalized only when such subsequent expenditure, after the asset has been acquired, would enable (although such costs has been incurred to establish the ownership right of the asset in the lawsuit) the patent to generate future economic benefits in excess of the originally assessed standard of performance. Thus the legal costs incurred by the company in the given case will be expenses and will be charged to the Income statement as it has not generated any future benefit in excess of the originally assessed performance of the asset and hence does not meet the recognition criteria under the US GAAP.
	Therefore, the journal entry that would be passed for the litigation cost of $ 660,000 will be:
Date	Account Title	Debit $	Credit $
	Litigation Expense	660000
	Cash		660000
3	Since the Patent value does not change due to the litigation cost,
	the Patent Amortization for the year 2018 will be same as $ 512500
4	Under IFRS, the infringement litigation cost will be capitalized on the ground that it was incurred to defend the title of the patent and therefore the ownership of the intangible asset.
a	Particulars	$
	Cost of the Patent as on June 30 2016	4100000
	Less: depreciation for the year 2016	-256250
	Written down Value as on Jan 1' 2017	3843750
	Less: depreciation for the year 2017	-512500
	Written down Value as on Jan 1' 2018	3331250
	Add: Cost of litigation against infringement	660000
	Book Value as on Jan 1 2018	3991250
	Less: Patent Amortization for the year 2018	-665208
	Note: Patent Amortization per year after 2017
	(Revised Cost - Residual Value)/ Remaining useful Life
	(3991250 - 0) / 6 = $ 665208
b	Journal Entry for recording litigation costs
Date	Account Title	Debit $	Credit $
	Patent	665208
	Cash		665208
	(being litigation cost incurred capitalized)