Question

Martinez, Inc. acquired a patent on January 1, 2017 for $4900 cash. The patent was estimated to have a useful life of 10 years with no residual value. On December 31, 2018, before any adjustments were recorded for the year, management determined that the remaining useful life was 7 years with that new estimate being effective as of January 1, 2018). On June 30, 2019, the patent was sold for $26.900. Required: a. Prepare the journal entry to record the acquisition of the patent on January 1, 2017 b. Prepare the journal entry to record the annual amortization for 2017 c. Compute the amount of amortization that would be recorded in 2018 d. Determine the gain oss) on sale on June 30, 2019 e. Prepare the journal entry to record the sale of the patent on June 30, 2019. Complete this question by entering your answers in the tabs below. Req A Reg C Reg D Req E Prepare the journal entry to record the acquisition of the patent on January 1, 2017 and for the annual amortization for 2017. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.) View transaction list Journal entry worksheet Record the entry for acquisition of patent. Note: Enter debits before credits. Date General Journal January 01, 2017 Debit Credit Record entry Clear entry View general journal RISEB Reqc >

Answer 1

Following are the answers:

Req A:

The details provided in the question are as under:

Cost of purchase of Patent is $41,900 on January 1, 2017. The estimated life is 10 years.

Journal entry to record purchase of Patent is :

Date	General Journal	Debit	Credit
January 1, 2017	Patent A/c	$        41,900
	To Cash A/c		$        41,900
	(Being cost of Patent purchased is capitalized)

Patent A/c will be created under the head Asset Category. Journal entry is to be recorded for the value of total cost incurred to purchase Patent i.e. $41,900

Req B:

Total purchase cost is $41,900 , total useful life of Patent is 10 years. To arrive at yearly amortization value we need to divide total purchase cost by total useful life. Formula to derive yearly amortization value will be as under:

Yearly Amortization value = Total Purchase Cost

Total useful life in years

Current Scenario:

Yearly amortization = $41,900

10

Yearly amortization = $4,190

Journal entry to record annual amortization for year 2017:

There are two options to record amortization:

Option 1- To record amortization by directly crediting the amortization amount to Patent A/c

Date	General Journal	Debit	Credit
December 31, 2017	Amortization A/c	$          4,190
	To Patent A/c		$          4,190
	(Being amortization of Patent for the year 2017 recognized)

Here Amortization A/c will be created under Profit & Loss-Expense A/c

Option 2 - To record amortization by crediting amortization amount to Amortization fund

Date	General Journal	Debit	Credit
December 31, 2017	Amortization A/c	$          4,190
	To Amortization Fund A/c		$          4,190
	(Being amortization of Patent for the year 2017 recognized)

Here Amortization Fund A/c will be created under Balance Sheet- Liability A/c. In Balance sheet on Assets side Patent A/c will be reflected with full value i.e. $41,900 and Amortization fund will be shown on Liability side.

Req C:

As on December 31, 2018 before making any adjustment for year 2018 the amortization ideally would have taken place for Year 2017 only. Yearly amortization is $4,190 as calculated and explained in answer to Req. B above. On December 31, 2018 estimated useful life has been changed to 7 years which is effective from January 1, 2018.

To calculate revised yearly amortization value the formula is as under:

Revised Yearly Amortization = Remaining Balance to be amortized

Revised Estimated useful life

Remaining balance to be amortized = Total purchase cost -- Amount already amortized

In present scenario amortization has taken place for only 1 year i.e. for year 2017 for $ 41,190

Remaining balance to be amortized = $41,900 -- $4,190

= $37,710

Revised estimated useful life is 7 years as on January 1, 2018

Revised Yearly Amortization = $37,710

7

= $5,387.14

Amount to be recognized as amortization for year 2018 is $ 5,387.14

Req D:

Patent is sold on June 30, 2019 for $ 26,900.

To calculate gain or loss on sale of asset, we need to first calculate amortization till the date of sale. Here we have already calculated amortization for year 2017 $4,190 and for year 2018 $ 5387.14 as explained in Req. B & Req. C. We have to calculate amortization from January 1, 2019 to June 30, 2019 i.e. till the date of sale.

Yearly amortization for year 2018 was $ 5,387.14 hence it will be same for Year 2019 for full year i.e $ 5,387.14 but it is being sold on June 30, 2019 so,

amortization for one month = Yearly amortization

12

In present scenario amortization for one month = $ 5,387.14

12

= $ 448.93

Amortization for six months from January 1, 2019 to June 30, 2019 = $ 448.93 * 6

= $ 2,693.57

Gain / (loss) on sale = Sale value -- Book value

Book value = Total purchase cost -- Total amortization till the date of sale

In present scenario

Total amortization = $4,190 + $5,387.14 + $ 2693.57 = $ 12,270.71

2017	$    4,190.00
2018	$    5,387.14
2019 ( till the date of sale)	$    2,693.57

Book value = $ 41,900 -- $ 12,270.71

= $ 29,629.29

Gain/(loss) = $26,900 - $29,629.29

= ($2,729.29)

Therefore there is a loss of $ 2,729.29 on sale of Patent on June 30, 2019, on selling it for $ 26,900

Req E:

Patent is sold on June 30,2019 for $ 26,900. The loss the sale is $ 2,729.29 as calculated and explained in Req. D above.

The journal entry on the date of sale of Patent will be as under:

Journal entry will be based on how amortization is charged in books of accounts i.e whether amortization is charged directly to Patent A/c or it is credited to Amortization fund (both of these options are explained in Req. B above

Option 1- Recording amortization by directly crediting the amortization amount to Patent A/c

Date	General Journal	Debit	Credit
June 30, 2019	Cash A/c	$ 26,900.00
	Loss on Sale of Patent	$    2,729.29
	To Patent A/c		$ 29,629.29
	(being Patent sold for cash)

Patent A/c on June 30, 2019 will become 0 after posting of above entry.

Option 2- Recording amortization by crediting amortization amount to Amortization fund

Date	General Journal	Debit	Credit
June 30, 2019	Cash A/c	$ 26,900.00
	Loss on Sale of Patent	$    2,729.29
	Amortization Fund A/c	$ 12,270.71
	To Patent A/c		$ 41,900.00
	(being Patent sold for cash)

Amortization fund value is derived by adding amortization amount of following years:

2017	$    4,190.00
2018	$    5,387.14
2019 ( till the date of sale)	$    2,693.57

Patent A/c & Amortization Fund A/c on June 30, 2019 will become 0 after posting of above entry