During 2006, Volvo Machine Company spent $352,000 on research and development costs for an invention. This invention was patented on January 2, 2007, at a nominal cost that was expensed in 2007. The patent has a legal life of 17 years and an estimated useful life of 8 years. In January 2011, Volvo paid $32,000 for legal fees in a successful defense of the patent. Amortization for 2011 should be
A) $2,462.
B) $8,000.
C) $32,000.
D) $52,000.

Question

Quizplus · Accepted Answer

The total cost to acquire and defend the patent is $352,000 + $32,000 = $384,000. The patent has a useful life of 8 years, so annual amortization expense is $384,000/8 years = $48,000 per year. However, the patent was not acquired until January 2, 2007, so it only had 15 years of legal life remaining at the start of 2011. Therefore, the amortization expense for 2011 is $48,000/15 x 12 months = $16,000 for the year. The legal fees paid in 2011 are not included in the amortization calculation, as they are considered an expense of defending the patent rather than a cost of acquiring it.

During 2006, Volvo Machine Company Spent $352,000 on Research and Development