Granite Enterprises acquired a patent from Southern Research Corporation on 1/1/09 for $4 million. The patent will be used for five years, even though its legal life is 20 years. Rocky Corporation has made a commitment to purchase the patent from Granite for $200,000 at the end of five years. Compute Granite's patent amortization for 2009, assuming the straight-line method is used.
A)$380,000
B)$400,000
C)$760,000
D)$800,000 The $200,000 purchase commitment is treated as the residual value of the patent.Amortization is as follows:
($4,000,000 200,000) 5 years = $760,000

Question

Quizplus · Accepted Answer

The straight-line method is used to calculate the amortization expense of the patent. The formula is (Cost of Patent - Residual Value) / Useful Life. In this case, the cost of the patent is $4 million, the residual value is $200,000, and the useful life is 5 years. Therefore, the calculation is as follows: ($4,000,000 - $200,000) / 5 = $760,000. Therefore, the correct answer is option C.

Granite Enterprises Acquired a Patent from Southern Research Corporation on 1/1/09