Question

During 2016, Swifty Corporation spent $174,240 in research and development costs. As a result, a new product called the New Age Piano was patented. The patent was obtained on October 1, 2016, and had a legal life of 20 years and a useful life of 10 years. Legal costs of $49,680 related to the patent were incurred as of October 1, 2016 Prepare all journal entries required in 2016 and 2017 as a result of the transactions above. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the аmounts.) Debit Date Account Titles and Explanation Credit 2016 (To record research and development expenses) 2016 (To record legal expenses) 2016 (To record amortization expense) 2017

Answer 1

Requirement 1

Patent has to be amortized over the useful life and not legal life. The required journal entries are:

Date	Particulars	Debit ($)	Credit ($)
2016	Research and Development expense	174,240
	Cash		174,240
	(To record R&D expense)
	Patents	49,680
	Cash		49,680
	(To capitalize legal expenses to patents)
	Patent amortization expense (49,680*3/12*1/10)	1,242
	Patent		1,242
	(To amortize patent)
2017	Patent amortization expense (49,680*1/10)	4,968
	Patent		4,968
	(To amortize patent)

Requirement 2

Date	Particulars	Debit ($)	Credit ($)
2018	Patents	9,000
	Cash		9,000
	(To record patent)
2018	Patent amortization expense (Note below)	4,520
	Patent		4,520
	(To amortize patent)
2019	Patent amortization expense (Note below)	4,200
	Patent		4,200
	(To amortize patent)

The life of the patent is increased to 12 years as on June 1,2018. Till June 1,2018, the old 10 years shall be used to amortize. The amount of 9,000 shall be added to book value as on June 1,2018 and be amortized for 12 years as:

Particulars	Amount ($)
Patent as on 2016 (legal costs)	49,680
Less: amortization for 2016 and 2017 (1242+4968)	6,210
Book value of patent as on 1.1.2018	43,470
Less: amortization for 2018 till May 30,2018 (4968*5/12)	2070
Book value as on 01.06.2018	41,400
Add: Legal cost capitalized	9,000
Total	50,400
Amortization for 2018 - 7 months from June 1 to Dec 31 (50400*7/12*1/12)	2,450
Total amortization for 2018 (2070+2450)	4,520
Full amortization for 2019 = 50,400*1/12	4,200

Requirement 3

Date	Particulars	Debit ($)	Credit ($)
2020	Patent amortization expense (Note below)	21,875
	Patent		21,875
	(To amortize patent)

Book value as on 01.06.2018	41,400
Add: Legal cost capitalized	9,000
Total	50,400
Amortization for 2018 - 7 months from June 1 to Dec 31 (50400*7/12*1/12)	2,450
Book value as on 01.01.2019	47,950
Less: amortization for 2019	4,200
Book value as 0.1.01.2020	43,750

This has now useful life of 2 years. Hence, equal amount shall be amortized.

Each year amortization shall be 43,750/2 = $ 21,875

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