Question

Jason purchases a patent at a cost of $24,000. The patent has 8 years of legal life remaining from the date of purchase. a. The patent is an intangible so it is amortized for cost recovery b. Jason can only recover his cost when he sells the patent c. Both statements are correct. d. Neither statement is correct.

Answer 1

Answer:

The correct  option is A,the patent is an intangible so it is amortized for cost recovery

Explanation:

The patent is an intangible asset that needs to be amortized on its remaining legal life in order to spread its initial costs of $24,000 over the periods when the income relating to the patent is received.

Hence, in order to recover the cost of patent , a patent amortization of  $3,000($24,000/8) would be recognized in the financial statements as an expense just like depreciation on intangible assets

Answer 2

Answer: a. The patent is an intangible so it is amortized for cost recovery

Explanation:

Just as Depreciation exists for the wearing and tearing of tangible Assets, so does AMORTIZATION exist for Intangible Assets like goodwill, patents, licenses, copyrights and logos.

It follows essentially the same process as Depreciation and the useful life estimation is usually discretionary because some Intangible Assets can give benefits forever such as logos.

Generally though, only Intangible Assets with estimable useful lives are amortized such as Patents and Trademarks.