On January 1, Year 1, Sanders Company acquired a patent in conjunction with the
ID: 2527290 • Letter: O
Question
On January 1, Year 1, Sanders Company acquired a patent in conjunction with the purchase of another company. The patent, valued at $600,000, was estimated to have a 10-year life and no residual value. Sanders uses the straight-line method of amortization for intangible assets. The unamortized cost (balance in the Patent account) was $480,000 at December 31, Year 2. On January 5, Year 3, Sanders successfully defended its patent against infringement and paid cash of $40,000 for the related litigation costs. What is the amount of amortization expense that will be recorded for Year 3?
Amortization Expense ???????Explanation / Answer
Amortisation expense recorded will be 65,000.
US GAAP literature on intangibe assets states that if legal costs are incurred for a successfully defending a patent infringement (or a similar litigation for patents/intangible assets), associated legal costs can be capitalised. These are considered as a part of obtaning and retaining the asset and therefore, can be capitalised. These are in a way, deferred legal costs.
These costs would be added to the book value of the asset. Therefore, the revised book value of the asset will be 520,000 (480,000+40,000). This amount of 520,000 would be amortized over the balance useful life, i.e. 8 years. Therefore, the amortisation would be 65,000 (520,000/8).