On June 1, 2018, Red Corporation purchased an existing business. With respect to the acquired assets of the business, Red allocated $300,000 of the purchase price to a patent. The patent will expire in 20 years. Determine the total amount that Red may amortize for 2018 for the patent.
A) $0
B) $1,667
C) $11,667
D) $35,000
E) None of the above

Question

Quizplus · Accepted Answer

The total amount that Red may amortize for 2018 for the patent is calculated as follows:

Amortization expense = (Cost of patent - Residual value) / Useful life 
Residual value = 0 (assuming the patent has no salvage value) 
Useful life = 20 years

Amortization expense = ($300,000 - $0) / 20 = $15,000 per year

However, since Red purchased the business on June 1, 2018, it can only amortize the patent for half of the year (i.e. 7 months). Therefore, the amount that Red may amortize for 2018 is:

$15,000 x (7/12) = $8,750

Therefore, the closest option is C) $11,667.

On June 1, 2018, Red Corporation Purchased an Existing Business