Question

Van Frank Telecommunications has a patent on a cellular transmission process. The company has amortized the $18.90 million cost of the patent on a straight-line basis since it was acquired at the beginning of 2017. Due to rapid technological advances in the industry, management decided that the patent would benefit the company over a total of six years rather than the nine-year life being used to amortize its cost. The decision was made at the end of 2021.
Required:
Prepare the appropriate adjusting entry for patent amortization in 2013 to reflect the revised estimate.

Answer 1

Answer:

The appropiate Journal Entry would be the following:

Amortization Expense Dr. $5.25  million

                                     Patent Cr. $5.25 million

Explanation:

According to the given data, we have the following:

Original Cost of patent = $18.90 million

Hence, Annual Amortization (Old) = 18.90/9 = $2.1 million

Amortization till Date (2017 - 2021) = 2.1*4 = $8.4 million

Hence, Unamortized Value = 18.90 - 8.4 =$ 10.5 million

Also, Remaining Life = 6 - 4 = 2 Years

Therefore, The New Amortization = Unamortized Value/Remaining Life = 10.5/2 = $5.25 million

The appropiate Journal Entry would be the following:

Amortization Expense Dr. $5.25  million

                                     Patent Cr. $5.25 million