Question

solve based calculation question

On 1 January 2019, Candid PLC Corporation applied for a patent, incurring legal costs of $32,000. In January 2020, Candid PLC incurred $14,000 of legal fees in a successful defense of its patent right. Consider the following independent situations.

a. Compute 2019 amortization, year-end book value, 2020 amortization, and year-end book value if the company amortizes the patent over 8 years.

b. Compute the 2020 amortization and the year-end book value, assuming that at the beginning of 2020, Candid PLC determines that the patent will provide no future benefits beyond December 31, 2022.

c. Compute the 2021 amortization and the year-end book value, assuming that at the beginning of 2021, based on new market research, Candid PLC determines that the recoverable amount of the patent is $24,000.

Answer 1

a. Computation of 2019 amortization, year-end book value if the company amortizes the patent over 8 years:

Particulars		Patents
		$
Purchase Price	A	32,000
Estimated Salvage value	B	0
Value to be depreciated in its useful life	C=A-B	32,000
Useful Life of Asset (in Years)	D	8
Amortization value per year as per SLM	E=C/D	4,000

Therefore, amortization for the year 2019 = $4,000 and year end book value = $32,000 - $4,000 = $28,000

(2) Computation of 2020 amortization, year-end book value if the company amortizes the patent over 8 years:

Particulars		Patents
		$
Year beginning Value	A	28,000
Add: Legal Costs	B	14,000
Value to be depreciated in its useful life	C=A+B	42,000
Remaining Useful Life of Asset (in Years)	D	7
Amortization value per year as per SLM	E=C/D	6,000

Therefore, amortization for the year 2020 = $6,000 and year end book value = $42,000 - $6,000 = $36,000

b. Computation of the 2020 amortization and the year-end book value, assuming that at the beginning of 2020, Candid PLC determines that the patent will provide no future benefits beyond December 31, 2022.

When there is a change in the estimated useful life of the asset it is termed as change in accounting estimate.

Changes in Accounting Estimates must be accounted for prospectively in the financial statements, i.e. the effects of the change must be incorporated in the accounting period in which the estimates are revised. Therefore, carrying amounts of assets and liabilities and any associated expense and gains are adjusted in the period of change in estimate.

Particulars		Patents
		$
Year beginning Value	A	28,000
Add: Legal Costs	B	14,000
Value to be depreciated in its useful life	C=A+B	42,000
Remaining Useful Life of Asset (in Years)	D	3
Amortization value per year as per SLM	E=C/D	14,000

Therefore, amortization for the year 2020 = $14,000 and year end book value = $42,000 - $14,000 = $28,000.

c. Computation the 2021 amortization and the year-end book value, assuming that at the beginning of 2021, based on new market research, Candid PLC determines that the recoverable amount of the patent is $24,000.

When there is a change in the residual value of the asset it is termed as change in accounting estimate.

Changes in Accounting Estimates must be accounted for prospectively in the financial statements, i.e. the effects of the change must be incorporated in the accounting period in which the estimates are revised. Therefore, carrying amounts of assets and liabilities and any associated expense and gains are adjusted in the period of change in estimate.

Particulars		Patents
		$
Opening Book Value for Year 2021	A (Part a(2))	36,000
Estimated Salvage value	B	24,000
Value to be depreciated in its useful life	C=A-B	12,000
Remaining Useful Life of Asset (in Years)	D	6
Amortization value per year as per SLM	E=C/D	2,000

Therefore, amortization for the year 2021 = $2,000 and year end book value = $36,000 - $2,000 = $34,000