X Company purchased a patent on January 3, year 7 from Y Company for $145,000. An...

X Company purchased a patent on January 3, year 7 from Y Company for $145,000. An attorney drew up the contract between X & Y at a total cost of $15,000, which was split equally by the parties. The patent had a carrying value of $90,000 on Y’s books. X expects to be able to benefit from the patent for 10 years, after which it is expected to be of little to no value.

What will be the carrying value of the patent on X Company’s December 31, year 8 balance sheet?

		$160,000
		$122,000
		$128,000
		$152,500

Expert Solution

The patent purchased by X Company shall be initially recognised at purchase cost which shall include the cost incurred by X Company on the attorney's professional charges.

Hence, the patent is initially recognised in the books at $145,000 plus X's share of the attorney's professional charges amounting to 50% of $15,000, i.e. $7,500, which comes to $152,500 as on January 3, year 7.

X expects that the useful life for the patent is 10 years.

So, the cost of the patent shall be amortized over a period of 10 years on a straight line basis.

Amortisation cost/year = 152500/10 = $15,250

Therefore, carrying value of the patent on X Company's December 31, year 8 balance sheet is given below:

Particulars	Amount (in $)
Initial recognition of patent as on January 3, year 7	152,500
Less: Amortisation for year 7	15,250
Less: Amortisation for year 8	15,250
Carrying value of patent as on December 31, year 8	122,000

Hence, the 2nd option i.e. $122,000 is correct and rest all are incorrect as per the above calculation.

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