In early January 2013, Lerner Corporation applied for a patent, incurring legal

Question

In early January 2013, Lerner Corporation applied for a patent, incurring legal costs of $60,000. In January 2014, Lerner incurred $9,000 of legal fees in a successful defense of its patent. Instructions (a) Compute 2013 amortization, 12/31/13 carrying value, 2014 amortization, and 12/31/14 carrying value if the company amortizes the patent over 10 years. (b) Compute the 2015 amortization and the 12/31/15 carrying value, assuming that at the beginning of 2015, based on new market research, Lerner determines that the fair value of the patent is $44,000. Estimated future cash flows from the patent are $49,000 on January 3, 2015.

Explanation / Answer

Part (A)

1) computation of Amortization

For the year 2013 =

Cost incurred to acquire the patent = 60000

No of years of use of patent = 10

Amortization expensas on 31/12/2013 = 60000/10 = 6000

Carrying value = 60000-6000= 54000

Amortization expense as on 31/12/2014= 6000

Carrying value = 54000-6000= 48000

Part (B) =

Calculation of amortization expense

Value of patent as on 31/1/15 =

Future cash flows or carrying value or fair value

But the 1st preference is given to future cash flows, i.e. 49000

Remaining useful life = 8 yrs

Amortization expense = 49000/8 = 6125

Carrying value as on 31/12/2015 = 49000-6125= 42875

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