Your company pays $620,000 for a patent that has 10 years remaining.After two years,the company sells the patent for $500,000.The company should report:
A)a debit to cash of $500,000 and a credit to patents of $500,000.
B)a debit to patents of $620,000,a credit to cash of $500,000,and a credit to accumulated amortization of $120,000.
C)a debit to cash of $500,000,a debit to accumulated amortization of $124,000,a credit to patents of $620,000,and a credit to gains of $4,000.
D)a debit to patents of $496,000,a debit to losses of $4,000,and a credit to cash of $500,000.

Question

Quizplus · Accepted Answer

When the company sells the patent, the cost of the patent ($620,000) must be removed from the books and the proceeds from the sale ($500,000) must be recorded. The company has also held the patent for two years, so accumulated amortization (the allocation of the cost of the patent over its useful life) must also be recorded.

Therefore, the entry should be a debit to cash for $500,000, a debit to accumulated amortization for $124,000 ($620,000/10 years * 2 years), a credit to patents for $620,000, and a credit to gains for $4,000 ($500,000 - $620,000 + $124,000).

Option A is incorrect as it only credits patents for the amount of the sale, not accounting for the cost and accumulated amortization. Option B is incorrect as it credits accumulated amortization but debits patents for the full cost of the patent. Option D is incorrect as it only debits patents for the amount of the loss, not accounting for the cost and accumulated amortization.

Your Company Pays $620,000 for a Patent That Has 10