Question

P6-47A Part 2 (alt3) Suppose Durtan paid $2.4 million for a patent related to an integrated system, including hands-free cell phone, GPS, and iPod connectivity. The company expects to install this system in its automobiles for eight years. Durtan will sell this as an "extra" for $1,000. In the first year, 10,400 units were sold. All costs per unit totalled $850. Required 1. As the CFO, how would you record transactions relating to the patent in the first year? 2. Prepare the income statement for the integrated system's operations for the first year. Evaluate the profitability of the integrated system's operations. Use an income tax rate of 32 %. 3. Explain what items were recorded as assets and why Requirement 1. As the CFO, how would you record transactions relating to the patent in the first year? Durtan paid $2.4 million for a patent related to an integrated system, including hands-free celll phone, GPS, and iPod connectivity. Record the transaction. (Record debits first, then credits. Explanations are not required.) Journal Entry Date Accounts Debit Credit Choose from any list or enter any number in the input fields and then click Check Answer. ? 7 parts remaining Clear All Check Answer earch 一微信网页版和13 1:33 Course Home- G.. 中)中 區 2019/11/22 ALIEN WARE "-) DELETE END 12 F6 F7 FB F9 FIO F11 F12 HOME 3 FS 4 ERT PAUSE TPAD PRT SCRN ALIEN FX & BACKSPACE NUM LOCK

only need to complete the table

Answer 1

Patent is an intangible asset, that is not identifiable individually. To use the patent and to install it in automobile, Cell phone/i-Pod with GPS connectivity is significant. Thus, Patent can be capitalized only along with those items. Generally, Installation should form part of Patent agreement and should not be charged anything additionally.

Thus entry in Year 1 for Patent capitalization:

Dr. Patent - Intangible Asset $ 2,400,000

Cr. Cash / Bank / AP $ 2,400,000

(Being Patent acquired capitalized)

Amortization or useful life of Patent would be agreed between parties (buyer & seller) as part of Patent Agreement. In the said example, it is 8 years. There cannot be any salvage value for patent generally, because of technology development day by day in the world.

Thus Entry in year 1 for Amortization:

Dr. Amortization $ 300,000 ($2400,000/8yrs)

Cr. Patent - Intangible asset $ 300,000

(Being Patent amortization accounted)

Another point to consider, this Patent is not a saleable item like automobile. Only Automobiles are sold along with this facility for an additional cost of $1000 per unit (i.e.) ownership of automobile can be transferred and not the ownership of Patent. Hence Revenue generated from sale of this "extra" item form part of income statement.