Question

On January 1, 2021, The Donut Stop purchased a patent for $82,000. At that time, the remaining legal life was 15 years, but the company estimated the patent would be useful for only five more years. In late December 2022, the company incurred legal fees of $34,000 in successfully defending the patent in an infringement suit. The successful defense did not change the company's estimate of the patent’s useful life. The Donut Stop's year-end is December 31. 1. Record the journal entries for the following transactions. (If no entry is required for a particular transaction/event, select "No Journal Entry Required" in the first account field.)

(1) Record the purchase of the patent in 2021. (2) Record the amortization in 2021. (3) Record the cost of legal fees and amortization in 2022. (4) Record amortization in 2022 (for simplicity, assume no amortization for the legal fees is recorded in 2022 because the expenditures did not occur until late December).

. What is the balance in the Patents account at the end of 2022?

Answer 1

Solution:

(1) Record the purchase of the patent in 2021

On 1^st January 2021 when the Donut Stop purchased the patent, below journal entry is required to be made:

Patent and Trademark –     Debit               $ 82,000

Cash/Bank - Credit             $ 82,000

Note: Credit of cash or bank would depend on the mode of payment. If this is not purchased upfront and remain payable to someone, then you can credit the Party account which stands payable.

2) Record the amortization in 2021

On 31^st December 2021 when the company is closing the books, the company amortize this in 5 equal installment the company estimated its useful life being 5 years so the amortization entry would be as below:

Amortization Expense                     Debit               $ 16,400

Patent and Trademark                     Credit             $ 16,400

Note: $ 16,400 is 1/5^th of $ 82,400 being amount of each amortization expense

3) Record the cost of legal fees and amortization in 2022.

Legal fee and expense                   Debit               $ 34,000

Cash/Bank/Supplier                        Credit             $ 34,000

Note: The entire amount needs to be expenses off as the legal suit did not have any impact on the useful life of the patent.

You can credit cash/bank depending upon the payment mode or supplier if this still remain payable while closing books

(4) Record amortization in 2022 (for simplicity, assume no amortization for the legal fees is recorded in 2022 because the expenditures did not occur until late December).

Amortization Expense                     Debit               $ 16,400

Patent and Trademark                     Credit             $ 16,400

Note: $ 16,400 is 1/5^th of $ 82,400 being amount of each amortization expense. This is on the assumption that the company still consider useful life of patent being 5 years.

What is the balance in the Patents account at the end of 2022?

Patent original purchase cost                                                           $ 82,000

Less: Amortization for the year ending December 2021 $ 16,400

Balance at the beginning of the year 2022 $ 65,400

Less: Amortization for the year ending December 2022 $ 16,400

Balance at the end of the year 2022                                                     $ 49,200

Ps. Instead of using account head Patent and Trademark, you can use on only Patent if the company maintain ledger with this name only.