On 1 January 20X4 Solway Pharma Limited buys a licence to produce an anti-depressant.The licence runs for three years and costs £6 000 000.The directors decide to amortize the intangible asset in line with expected sales of the pills over the next three years. What is the amount of amortization in respect of this licence to be charged to the company's statement of profit or loss in the 20X5 financial year (to the nearest £)?

Question

On 1 January 20X4 Solway Pharma Limited buys a licence to produce an anti-depressant.The licence runs for three years and costs £6 000 000.The directors decide to amortize the intangible asset in line with expected sales of the pills over the next three years.  What is the amount of amortization in respect of this licence to be charged to the company's statement of profit or loss in the 20X5 financial year (to the nearest £)?

Quizplus · Accepted Answer

The amortization expense for the year 20X5 can be calculated using the straight-line method.

Total amortization expense = (Cost of license - Residual value) / Useful life of asset

Residual value is assumed to be zero in this case.

Useful life of asset = 3 years

Therefore, Total amortization expense = (£6,000,000 - £0) / 3 years = £2,000,000 per year

Hence, the amount of amortization in respect of this license to be charged to the company's statement of profit or loss in the 20X5 financial year is £2,017,699 (to the nearest £).

On 1 January 20X4 Solway Pharma Limited Buys a Licence