Question

Kingston, Inc., acquired a patent on January 1, 2016 for $40,000 cash. The patent was estimated to have a useful life of 10 years with no residual value, and the firm decided to use straight-line amortization. On January 1, 2017, management determined that the remaining useful life was actually only 6 years. On June 30, 2018, the patent was sold for $25,000.

1.Show the journal entry to record the acquisition of the patent on January 1, 2016 (3 points).

2. Show the journal entry to record amortization of the patent for 2016 (3 points).

3. Compute the amount of amortization that would be recorded for 2017 (3 points).

4.. Prepare the journal entry to record the sale of the patent on June 30, 2018 (4 points).

Answer 1

Solution:

Step 1: compute the amortization expense for the year 2016 & 2017:

Cost of patent	$40000
Residual value	$0
Useful life of patent	10 years
Annual amortization expense=($40000 - $0)/10	$4000
Amortization expense charged in year 2016	$4000

The change of useful life of patent is an change in accounting estimate, hence the amortization expense shall be calculated prospectively with the changed useful life.

WDV Of the patent as at January 01 2017 ($40000 - $4000)=	$36000
Remaining useful life of patent as at January 01 2017	6 years
Amortization expense for the year 2017 ($36000 - $0)/6	$6000

Step 2:

compute the gain (loss) on sale of patent:

Amortization expense from January 1 2018 to june 30 2018($6000 x 6/12)=$3000

Accumulated amortization on the date of sale of patent:

Amortization expense charged in year 2016	$4000
Amortization expense charged in year 2017	$6000
Amortization expense charged in year 2018(till June)	$3000
Accumulated amortization	$13000

WDV Of the patent at the time of sale ($40000 - $13000) = $27000

Sale price of patent=$25000

Loss on sale of patent=($27000 - $25000)=$2000

a.

Journal entry to record acquisition of patent:

Date	General journal	Debit	Credit
Jan 01 2016	Patents	$40000
	Cash		$40000

b.

Journal entry to record annual amortization for 2016:

Date	General journal	Debit	Credit
Dec 31 2016	Amortization expense	$4000
	Accumulated amortization		$4000

c.

Amortization for year 2017=$6000

d.

Journal entry to record the sale of the patent:

Date	General journal	Debit	Credit
June 30 2018	Cash	$25000
	Accumulated amortization	$13000
	Loss on sale of patent	$2000
	Patent(cost)		$40000

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