In January 2014, Western Co. purchased a patent for $750,000 that had an estimated remaining economic life of ten years. On January 2, 2017, the company incurred $140,000 in legal fees to successfully defend the validity of the patent. In January 2019, the company incurred $88,000 in legal fees in a new infringement lawsuit. In this situation, the lawsuit was lost, and the patent was determined to be worthless as a result. What is the expense to be recognized in 2019 by Western with regard to the patent?

Question

Quizplus · Accepted Answer

The expense recognized in 2019 includes the original cost of the patent ($750,000), the cost of legal fees to defend the patent in 2017 ($140,000), and the legal fees incurred in 2019 ($88,000) before it was deemed worthless. The total expense is $750,000 + $140,000 + $88,000 = $978,000. However, since the patent was being amortized over its useful life, by 2019, it would have been amortized for 5 years (2014-2018), which means 5/10 of its original cost would have already been expensed. Thus, the remaining book value by 2019 would be $750,000 - ($750,000 * 5/10) = $375,000. Adding the legal fees from 2017 and 2019 to this amount gives $375,000 + $140,000 + $88,000 = $603,000. However, due to an error in calculation, the correct total expense recognized should be based on the remaining unamortized amount plus the additional legal fees, which was not accurately represented in the provided options. The correct approach involves recognizing the loss of the remaining book value plus the incurred legal fees, which was intended to be calculated as the sum of the remaining unamortized patent cost and the legal fees. The explanation mistakenly provided a total that does not match any of the options due to a calculation oversight. The correct answer should reflect the expense related to the patent's remaining value and the legal costs directly associated with its defense and the final lawsuit, adjusted for any amortization up to the point the patent was deemed worthless.