Question

Van Frank Telecommunications has a patent on a cellular transmission process. The company has amortized the patent on a straight line basis since 2009, when it was acquired at a cost of 9 million at the beginning of that year. Due to rapid technological advances in the industry, management decided that the patent would benefit company over a total of six years rather thanf the nine year life being used to amortize its costs. The decision was made at the end of 2013 (before adjusting and closing entries).

Answer 1

Answer: debit amortization expense  account $2.5million

Question:

Required:  Prepare the appropriate adjusting entry for patent amortization in 2013 to reflect the revised estimate.

Explanation: Amortization is the deduction made every period to reflect the cost of an intangible asset such as patent and intellectual property.

When amortization uses a straight line method, which is usually the case in patents, we deduct equal usefulness over its useful life and deduct equal amounts every period.

The patent has already been amortized at an amount of $1 million ($9 million divided by 9 years) annually for 4 years (2009, 2010, 2011, 2012).

This leaves us with $5 million to be amortized ($9 million - $4 million ). However the useful life has been adjusted to 6 years instead of 9, so $5 million has to be amortized in 2 years, making the amount to be deducted $2.5million per year.

On December 31, 2013, we will debit amortization expense  account $2.5million and credit the patent account with $2.5million