Question

Franklin designs purchased the patent of a new couch design. the patent had a remaining life of 18 years, so franklin amortized the cost of the patent over 18 years. however, experts believe that the couch design will only be popular for six years. how will this affect the accuracy of franklin's financial statements?

Answer 1

If amortisation expenses are spread over 18 years rather than 6 years, amortisation expenses will be lower than they should be. This will cause an increase in net income. In addition, because less of the cost has been expensed, the remaining value of the patent will be too high, thus overstating assets.