Accounting for a Patent
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In early January 2005, Lerner Corporation applied for a patent, incurring legal costs of $50,000. In January 2006, Lerner incurred $9,000 of legal fees in a successful defense of its patent.
Instructions
(a) Compute 2005 amortization, 12/31/05 carrying value, 2006 amortization, and 12/31/06 carrying value if the company amortizes the patent over 10 years.
(b) Compute the 2007 amortization and the 12/31/07 carrying value, assuming that at the beginning of 2007, based on new market research, Lerner determines that the fair value of the patent is $44,000. Estimated future cash flows from the patent are $45,000 on January 3, 2007.
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Solution Summary
The solution explains the various entries relating to accounting for patents.
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a) 2005 amortization: $50,000 ÷ 10 yrs. = $5,000
12/31/05 carrying value: $50,000 - $5,000 = $45,000
For 2006 we can capitalize the defense (successful)
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