On June 1, 2014, Red Corporation purchased an existing business. With respect to the acquired assets of the business, Red allocated $300,000 of the purchase price to a patent. The patent will expire in 20 years. Determine the total amount that Red may amortize for 2014 for the patent.

Question

Quizplus · Accepted Answer

The formula for calculating annual amortization expense on a patent is (cost of patent)/useful life. In this case, the cost of the patent is $300,000 and the useful life is 20 years, so the annual amortization expense is $15,000. However, since Red only owned the patent for a portion of the year (from June 1 to December 31), they can only amortize a portion of this amount for 2014. The portion of the year they owned the patent is 7/12 (June to December is 7 months out of the 12-month year), so the amount that Red may amortize for 2014 is:

($15,000 annual amortization expense) x (7/12 portion of year owned) = $8,750
Therefore, the total amount that Red may amortize for 2014 for the patent is $11,667 ($8,750 + $2,917 for 5 months of amortization expense in 2015). Choice C is the correct answer.

On June 1, 2014, Red Corporation Purchased an Existing Business