Question

JE to Record R&D and Patent

6. During 2010, Bills Corporation spent $170,000 in research and development costs. As a result, a new product called the New Age Piano was patented. The patent was obtained on October 1, 2010, and had a legal life of 20 years and a useful life of 10 years. Legal costs of $18,000 related to the patent were included as of October 1, 2010.

(a) Prepare all journal entries in 2010 and 2011 as a result of the transactions above.

(b) On June 1, 2012, Bills spent $9,480 to successfully prosecute a patent infringement suit. As a result, the estimate of useful life was extended to 12 years from June 1, 2012. Prepare all journal entries required in 2012 and 2013.

(c) In 2014, Bills determined that a competitor’s product would make the New Age Piano obsolete and the patent worthless by December 31, 2015. Prepare all journal entries required in 2014 and 2015.

Answer 1

Answer :

(a). Following entries will be made in 2010

Date	Particulars	Debit	Credit
1-Oct-2010	Research and development expense	170,000
	Cash		170,000
(The above entry is made to expense the R&D amount)
1-Oct-2010	Patents	18,000
	Cash		18,000
(The above entry has been made to capitalize the legal costs. The legal costs has been capitalized as it is direct legal cost associated with the New Age Piano)
1 Oct-2010	Patent amortization expense	450
	Patents		450
(The cost of 18,000 will have to be amortized for 3 months of October, November and December in 2010 amount = 18,000/10 years *3/12 = 450)

(b).

Date	Particulars	Debit	Credit
1 - Jun - 2012	Patents	9,480
	Cash		9,480
1- June - 2012	Patent amortization expense	1,940
	Patents		1,940

• For January to 1st June the amortization would be 18000/10*5/12 = 750
• From 1st June to 31st December the patent amount would be = initial expenses - amount already amortized + additional expenses of 9480. Thus the amount would be = 18,000 -450 - 1800 - 750 + 9480 = 24480. Thus patent amortization expense = (24480/12*7/12)+750 = 1940.

The following entry would be made for the year 2013

Date	Particulars	Debit	Credit
31.Dec-13	Patent amortization expense	2,040
	Patents		2,040

2040 = 24480 / 12

(c). Balance in patent amount = 24480 - 1190 - 2040 = 21250. This amount will be amortized in 2014

and 2015 and so the per year amortization would be 21250 /2 = 10625. Journal entries would be

Date	Particulars	Debit	Credit
31- Dec -14	Patent amortization expense	10,625.00
	Patents		10,625.00
31-Dec-15	Patent amortization expense	10,625.00
	Patents		10,625.00