Question

Presented below is selected information for Sandhill Company. Answer the questions asked about each of the factual situations. (Do not leave any answer field blank. Enter 0 for amounts.) 1. Sandhill purchased a patent from Vania Co. for $1,190,000 on January 1, 2018. The patent is being amortized over its remaining legal life of 10 years, expiring on January 1, 2028. During 2020, Sandhill determined that the economic benefits of the patent would not last longer than 6 years from the date of acquisition. What amount should be reported in the balance sheet for the patent, net of accumulated amortization, at December 31, 2020?

Answer 1

Answer:

$714,000

Explanation:

Amortization is the systematic allocation of the cost of an intangible asset to the income statement. While depreciation happens to a tangible asset, amortization happens to an intangible asset such as patent, trademark etc.

Mathematically,

Amortization

= Cost of asset / estimated useful life

= $1,190,000/10

= $119,000

At the start of 2020,

Carrying amount of patent

= $1,190,000 - 2($119,000)

= $952,000

Annual amortization from then, given that economic benefits of the patent would not last longer than 6 years from the date of acquisition (hence 4 years remaining)

= $952,000/4

= $238,000

Carrying amount reported in the balance sheet for the patent, net of accumulated amortization, at December 31, 2020

= $952,000 - $238,000

= $714,000