Question

SY-KOH Company incurred P425,500 of research and development cost to develop a product for which a patent was granted on April 30, 2016. Legal fees and other costs associated with the registration of the patent totalled P68,800, legal fees in successfully defending amounted to 276,250. The estimated useful life of the patent is equal to its legal life. During 2019, SY-KOH determined that the economic benefits of the patent would not last longer than 8 years from the date of acquisition. Determine: a. How much is the amortization for the year ended, December 31, 2020? b. How much is the accumulated amortization as of December 31, 2020? c. What is the carrying value of the patent as of December 31, 2020? d. Supposing the product to which the patent is based was permanently withdrawn from sale under governmental order on December 31, 2021, how much should be recognized as a decrease in income in the income statement?

Answer 1

Here,two types of costs are incurred:

One is for research and develpoment and another is for the acquisition of Patent.

If an enterprise is unable to distinguish the researh phase from the develpoment phase, then the enterprise treats the expenditure on that product as if it were incurred in research phase only and accordingly the expenditure should be recognised as an expense when it is incurred.

Therefore, the cost associated with research and develpoment of the product is to be recognised as expense in the year ended December 31,2016.

Now, Total cost of Patent as on April 30,2016:

1) Legal fees and other cost for registration 68,800

2) Legal fees for defending 76,250

Total Cost of Patent to be capitalised (1+2) 145,050

Life of patent is given as 8 years.

Amortisation Cost per year=1,45,050/8= 18,131.25 per year

(a) Amortisation for the year ended December 31,2020 = 18,131.25

(b) Accumulated amortisation as on December 31,2020  

Amortisation for 2016 =18,131.25*8/12 = 12,087.5

   Amortisation for 2017 = 18131.25

Amortisation for 2018 = 18131.25

Amortisation for 2019 = 18131.25

Amortisation for 2020 = 18131.25

Accumulated amortisation as an December 31,2020 = 84,612.5

(c) Carrying Value of the patent as on December 31,2020

Total cost of patent-accumulated amortisation till December 31,2020 = 141,050-84,612.5 = 56,437.5

(d) If the product to which patent is based is permanently withdrawn from sale under governmental order then whole Carrying value of the patent is recognised as decrease in income in the income statement i.e, 56,437.5 to be recognised as decrease in income in the income statement as on December 31,2021.