ELO Corporation purchased a patent for $225,000 on September 1, 2013. It had a useful life of 10 years. On January 1, 2015, ELO spent $55,000 to successfully defend the patent in a lawsuit. ELO feels that as of that date, the remaining useful life is 5 years. What amount should be reported for patent amortization expense for 2015?

Question

Quizplus · Accepted Answer

The cost of the patent is $225,000 and it has a useful life of 10 years. Therefore, the annual amortization expense is $22,500 ($225,000/10 years).

On January 1, 2015, ELO spent $55,000 on the patent. This cost should be added to the cost of the patent to determine the revised cost basis. The revised cost basis is $280,000 ($225,000 + $55,000).

ELO believes that the remaining useful life of the patent as of January 1, 2015, is 5 years. Therefore, the annual amortization expense for 2015 is $56,000 ($280,000/5 years).

However, since the $55,000 legal defense cost was incurred on January 1, 2015, only 8 months of the year remained after that date. Therefore, the amortization expense for 2015 should be adjusted downward to reflect the 8-month period. The adjusted amortization expense for 2015 is $37,333 ($56,000 x 8/12).

Therefore, the amount that should be reported for patent amortization expense for 2015 is $50,000 ($22,500 + $37,333). Option B is the correct answer.

ELO Corporation Purchased a Patent for $225,000 on September 1