Question

In January 2013, Findley Corporation purchased a patent for a new consumer product for $960,000. At the time of purchase, the patent was valid for fifteen years. Due to the competitive nature of the product, however, the patent was estimated to have a useful life of only ten years. During 2018 the product was permanently removed from the market under governmental order because of a potential health hazard present in the product.
What amount should Findley charge to expense during 2018, assuming amortization is recorded at the end of each year?

Answer 1

Answer:

$480,000

Explanation:

The basis for the amortization (or charge to p/l) of the patent will be the estimated life of 10 years.

As such, the charge to the income statement yearly (which is the result the cost divided by the useful life)

= $960,000/10

= $96,000

Between January 2013 and the start of 2018 is 5 years. Hence the accumulated amortization on this patent

= $96,000 * 5

= $480,000

The carrying amount of the patent as at then

= $960,000 - $480,000

= $480,000

Since during 2018 the product was permanently removed from the market under governmental order because of a potential health hazard present in the product as such the amortization expense for 2018 will be equivalent to the the carrying amount which is to be expensed or written off.