Question

Blue Co. has a patent on a communication process. The company has amortized the patent on a straight-line basis since 2017, when it was acquired at a cost of $42 million at the beginning of that year. 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 (before adjusting and closing entries). What is the appropriate patent amortization expense in 2021?

Answer 1

Answer:

11.66 million

Explanation:

Annual Amortization Expense:

= Cost of acquiring at the beginning of the year ÷ 9-year life

= $42 million ÷ 9

= $4.67 million per year

Year 2021 Amortization Expense 4 Years:  

= Annual Amortization Expense × 4

= $4.67 per year × 4 years

= $18.68 million

Unamortized Cost:

= Cost of acquiring at the beginning of the year - Amortization Expense 4 Years

= $42 million - $18.68 million

= $23.32 million

Patent amortization expense in 2021:

= Unamortized Cost ÷ 2

= $23.32 ÷ 2

= 11.66 million