A Company registered a patent on January 1, 2010.B Company purchased the patent from A Company for $450, 000 on January 1, 2015, and began to amortize the patent over its remaining legal life.In early 2016, B Company determined that the patent's economic benefits would last only until the end of 2021.What amount should B Company record for patent amortization in 2016?

Question

Quizplus · Accepted Answer

B Company purchased the patent from A company on January 1, 2015. The original legal life of the patent is unknown, but since B Company started to amortize from the purchase date, we can assume that the remaining legal life was estimated as of January 1, 2015 to be the economic life of the patent.

Using the straight-line method, the annual amortization cost would be the purchase price of $450,000 divided by the estimated remaining life of the patent as of January 1, 2015.

$450,000 / Remaining legal life = $450,000 / (End of 2021 - January 1, 2015) = $75,000 per year

Since B Company determined in early 2016 that the economic benefits of the patent would last only until the end of 2021, the remaining amortization expense for 2016 would be:

($75,000 - $0) x (Remaining days in 2016 / Total days in year) = $75,000 x (365-31) / 365 = $70,136

Therefore, the appropriate amount for patent amortization in 2016 would be $70,000, which is closest to Choice D.

A Company Registered a Patent on January 1, 2010