A Company Acquires A Patent For $20,000 To Manufacture And Sell An Item The Company Intends To Hold The Patent For 5 Years Amortization For The First Year Will Be Recorded With A Debit To Amortization Expense For $.

A Company Acquires A Patent For $20,000 To Manufacture And Sell An Item The Company Intends To Hold The Patent For 5 Years Amortization For The First Year Will Be Recorded With A Debit To Amortization Expense For $ | Short Question Answer
Given:

Cost of Patent = $20,000

Salvage Value = 0

Useful Life  = 5 Years, as the company intends to hold patent for 5 years.

Find:

Amortization Expense (AE) For Year 1 = ?

We know that A Exp. Formula, which is shown below:

AE For 1st Year = Cost - Salvage Value / Useful Life

AE For 1st Year = $20,000 – 0 / 5 = $4,000 (this is also annual amortization)

So, the amortization over patent charged to expense in the first year is $4,000. As straight-line method is used, so AE for every year is $4,000. The asset will be expired in consecutive five years i.e., from Y1 to Y5.

AE Journal Entry:

The following adjusting entry is recorded for AE at the end of the Y1:

                                                             AE a/c  $4,000

                                                                        Accumulated Amortization a/c  $4,000

                                                     (Amortization Over Patent Expensed Out For The Y1)

Here, AE account is debited as during the first year, a part of patent has expired / charged to expense according to matching p. It is recorded in the Income Statement for the current accounting year. while AA on Patent is a Contra Asset which is deducted from the cost of Patent on balance sheet.

The AE for 5 Years = Annual Amortization X 5 = $4,000 X 5 = $20,000

Once the patent intangible asset is fully amortized, it is removed from the company’s balance sheet.

Patent’s Book Value at the end of Year 1 = $20,000 - $4,000 = $16,000

P’s BV at the end of Y 2 = $20,000 - $8,000= $12,000

P’s Book Value at the end of Y 3 = $20,000 - $12,000= $8,000

P’s Book Value at the end of Y 4 = $20,000 - $16,000= $4,000

P’s Book Value at the end of Y 5 = $20,000 - $20,000= $0

Here P’s BV = Cost - Accumulated Amortization

Accumulated Amortization For Year 1 = $4,000

AA For Y 2 = $4,000 + $4,000 = $8,000

AA For Y 3 = $4,000 + $4,000 + $4,000 = $12,000

AA For Y 4 = $4,000 + $4,000 + $4,000 + $4,000 = $16,000

AA For Y 5 = $4,000 + $4,000 + $4,000 + $4,000 + $4,000 = $20,000

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