Question

Assume that X incurs $180,000 in legal costs on March 1, 2017, to successfully defend a patent. The patent’s useful life is 12 years, amortized on a straight-line basis. The adjusting entry on December 31, 2017 is ------

Select one:

a. Dr. Amortization expense $12,500 and Cr. Patent or Accumulated Amortization $12,500.

b. Dr. Depreciation expense $16,000 and Cr. Patent or Accumulated Amortization $16,000.

c. Dr. Depreciation expense $180,000 and Cr. Patent or Accumulated Amortization $180,000.

d. Dr. Depreciation expense $120,000 and Cr. Patent or Accumulated Amortization $120,000.

Clear my choice

Amortization of a premium increases bond interest expense, while amortization of a discount decreases bond interest expense.

Select one:

a. True.

b. False.

Answer 1

Answer is Option a.

The legal costs to defend a patent are amortized over the useful life of the patent. Amortization per year is $180,000/12 = $15,000 per year. In 2017 amortization will be charged for 10 months from March 1, 2017 to December 31, 2017. So amortization expense will be $15,000/12*10 =$12,500. Amortization expense is debited for $12,500 and Patent or Accumulated amortization is credited for $12,500. Hence the right answer is option a.

Answer is b. False

Amortization of premium decreases the interest expense. Premium on bonds payable is a credit balance and when it is amortized it is debited and credit is given to interest expense account. Hence interest expense will reduce

Amortization of discount increases the interest expense. Discount on bonds payable is a debit balance and when it is amortized it is credited and debit is given to interest expense account. Hence interest expense will increase.