Question

     Meadows Laboratories holds a valuable patent for a “gazak”. The history of costs

     associated with the “gazak” are as follows.

           Date                 Activity          Cost

     2000 – 2001     Research conducted to develop “gazak”                       $117,000

     Mar. 2002         Design and construction of a prototype                             81,500

     Oct. 2002          Testing simulations                                                           36,750

     Feb. 2003         Redesigning based on simulation results                         41,250

     Apr. 2004          Legal fees paid for patent granted May, 2004                   69,955

     May. 2008         Legal fees paid to successfully defend patent                  23,205

     Jan. 2010          Research aimed at modifying the “gazak” design             17,500

     Oct. 2013          Legal fees paid to successfully defend patent                  11,240

     Meadows assumed a useful life of 17 years for the patent in May, 2004. On January

     1, 2012, it revised its useful life estimate downward to 6 remaining years.

     Amortization is computed for a full year if the cost is incurred prior to July 1, and no

     amortization for the year if the cost is incurred after June 30. The company’s year

     ends December 31.

Instructions – Compute the carrying value of the “gazak” on each of the following dates:

1. December 31, 2005
2. December 31, 2008
3. December 31, 2011
4. December 31, 2013
5. December 31, 2015

Answer 1

Computation of carrying value of Gazak on the following dates :

a) As on Dec 31st 2005:

  

Date Activity Cost ( Amount in $ )

     2000 – 2001 Research conducted to develop “gazak”                       117,000

     Mar. 2002         Design and construction of a prototype                             81,500

     Oct. 2002          Testing simulations                                                           36,750

     Feb. 2003         Redesigning based on simulation results                         41,250   

     Apr. 2004          Legal fees paid for patent granted May, 2004                   69,955

Total Cost $ 3,46,455

No .of Year's - 17 years

Amortization for 2000 - 2001 - 1,17,000 / 17 = $ 6,882

Amortization for 2002 - 1,91,618 / 17 = $ 11,271

Amortization for 2003 - 2,21,597 / 17 = $ 13,035

Amortization for 2004 - 2,08,561 / 17 = $ 12,268

Total amortization upto 2014 - $ 43,456

Amortization for 2015 - ($ 3,46,455 - $43,456 ) / 17 = $ 17,823

Carrying value as on dec 31 2015 = $ 3,46,455 - $ 43,456 - $17,823 = $ 2,85,176

b) As on Dec 31st 2008:

Carrying value as on 1st jan 2008 = $ 2,51,625 { 2,85,176 - (2,85,176 /17 * 2) }

Cost incurred - $ 23,205

Revised cost - $ 2,74,830

Amortization for 2008 - $ 16,166

Carrying value as on 2008 : $ 2,58,663

C) As on dec 31st 2011 :

  Carrying value as on 1st jan 2011 - $ 2,28,232 { 2,58,663 - (2,58,663 /17 * 2) }

Cost incurred - $ 17,500  

Revised cost - $ 2,45,732

Amortization for 2011 - $ 14,454

   Carrying value as on 2011 : $ 2,31,277

d) As on dec 31st 2013 :

Carrying value as on 1st jan 2013 - $ 2,17,672 { 2,31,277 - (2,31,277 /17 ) }

cost incurred - 11,240

Revised cost - $ 2,28,912

Amortization - $ 38,152

Carrying value : $ 1,90,760