Intangible Assets

Subtitle
 Discussion Examples - Patent
Problem 45-1 Razor Company was granted a patent for an invention on
January 1, 2017. the costs of licensing and registration models and drawings
amounted to 255,000.

On January 1, 2019, the entity paid 90,000 in successfully defending the

patent in an infringement suit brought against the entity.

On January 1, 2020, the entity paid 510,000 for the acquisition of a

competing patent which has a remaining life of 16 years. The competing
patent is intended to protect the original patent.

Prepare journal entries from 2017 to 2020 to record the expenditures in

connection with the patent, including the annual amortization of patent.
Answers:
• 2017

Patent 255,000
Cash 255,000
12/31/2017
Amortization of patent 12,750
Patent 12,750 255,000/20 legal life

12/31/2018
Amortization of Patent 12,750
Patent 12,750
• 2019

Legal Expenses 90,000

Cash 90,000
12/31/2019
Amortization of Patent 12,750
Patent 12,750
2020
Patent 510,000
Cash 510,000
12/31/2020
Amortization of Patent 42,750
Patent 42,750
=510,000/17 = 30,000 20 – 3 expired life
+ 12,750 Old patent
42,750 Total Amortization
 Problem 45-2
• Blade company spent a total of 510,000 in developing a patent
which was applied for on July 1, 2017. The patent was issued on
January 1, 2018.
• The cost of licensing was nominal; and the useful life of the patent
is 15 years.
• On January 1, 2020, the entity purchased a related patent for
720,000. The related patent has a remaining useful life of 16
years. This related patent is believed to extend the useful life of
the old patent.
• On January 1, 2021, the entity purchased a competing patent for
540,000 in order to protect the original patent.
• Prepare journal entries from 2017 to 2021
Answer:
1/1/2018
Research and Development 510,000
Cash 510,000
1/1/2020
Patent 720,000
Cash 720,000

Amortization of Patent 45,000

Patent 45,000
=720,000/16
• 1/1/2021

Patent 540,000
Cash 540,000

Amortization of Patent 81,000

Patent 81,000
= 45,000 + 540,000/15
 Problem 45-3
Crystal Company summarized the following transactions
pertaining to patent.
2017 Spent 250,000 for the research and development of the
patent.
2018 Jan 1 Paid 60,000 to apply for and obtain right to the
patent. The useful life of the patent is 10 years.
2019Jan 1 Purchased for 600,000 a new patent that is
expected to prolong the life of the original patent by 6 years.
2020 Dec 31 A competitor obtained rights to a patent which
rendered the entity’s patent obsolete.
Prepare journal entries relating to the patent.
Answer:
2017 Research and development 250,000
Cash 250,000
1/1/2018
Patent 60,000
Cash 60,000
12/31/2018
Amortization of patent 6,000
Patent 6,000
=60,000/10
1/1/2019Patent 600,000
Cash 600,000
12/31/2019 Amortization of patent 43,600
Patent 43,600
= (60,000-6,000/(10-1+6)+600,000/15
12/31/2020
Amortization of Patent 43,600
Patent 43,600

Patent written of 566,800

Patent 566,800
=60,000-6,000-3,600-3,600 = 46,800
=600,000-40,000-40,000 = 520,000 = 566,800
 Copyright
Problem 46-1 Sanity company acquired a copyright to a best seller
novel for 285,000 on January 1, 2017. The copyright has a
remaining legal life of 20 years.
Sales of the novel are estimated as follows:
2017 50,000 copies
2018 30,000 copies
2019 10,000 copies
2020 5,000 copies
Prepare journal entries for 2017 and 2018
 Answer

• Copyright 255,000
Cash 255,000

Amortization of copyright 150,000 285,000/95,000

Copyright 150,000 = 3 * 50,000

Amortization of copyright 90,000

Copyright 90,000 = 3* 30,000
 Problem 46-2
• Steady company incorrectly charged the 300,000 cost of a
copyright acquired in early 2016 to the retained earnings
account. The error was discovered as part of the 2017 audit.
• The entity followed the policy of amortizing copyright over the
expected period of benefit by the straight line method.
• The copyright is expected to be useful in producing revenue for 5
years.
• Prepare journal entry necessary in 2017 to correct the prior
period error.
• Prepare journal entry to record the amortization of the copyright
for 2017.
Answer
1. Copyright 300,000
Retained Earnings 300,000

300,000/5=60,000 RE 60,000
Copyright 60,000

ORCopyright 240,000
Retained Earnings 240,000
2. Amortization of copyright 60,000
Copyright 60,000
 Leasehold Improvements
• Problem 46-11 On January 1, 2015, Averse company signed a 12
year lease for warehouse space. The entity has an option to renew
the lease for an additional 8-year period on or before January 1,
2018.
• During January 2017, the entity made substantial improvement to
the warehouse. The cost of the improvement was 540,000 with an
estimated useful life of 15 years.
• On December 31, 2017, the entity intended to exercise the renewal
option. The entity has taken a full year depreciation on this
leasehold improvement for 2017.
• On December 31, 2017, what is the carrying amount of the
leasehold improvement?
Answer: 504,000
=540,000/15= 36,000

=540,000-36,000=504,000 carrying amount

 Problem 46-12
• On January 1, 2015, Byword company signed an eight year lease
for office space. The entity has the option to renew the lease for
an additional four-year period on or before January 1, 2022.
• During January 2017, two years after occupying the leased
premises, the entity made general improvements to the premises
costing 3,600,000 and having an estimated useful life of 10 years.
• On December 31, 2017, the entity’s intention as to exercise of the
renewal option is uncertain because this will depend upon future
office space requirement. A full year depreciation expense is
taken for the current year.
• What amount should be recorded as depreciation of leasehold
improvement for the current year?
Answer: 600,000
• 8 lease year-2 expired=6 years
• Useful life of the improvement=10 years
• Shorter = 6 years

=3,600,000/6 years life (shorter) = 600,000

Thank You!
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