A company is preparing its financial statements for the year ended December 31, Year 1. On November 1, Year 1, the company purchased a patent for $300,000. The patent has a remaining legal life of 15 years and an estimated useful life of 10 years. The company uses the straight-line method for amortization. What is the amortization expense for the patent for Year 1?
- A$6,000
- B$30,000
- C$5,000
- D$0
Show answer & explanationAnswer & explanation
Correct answer: C. $5,000
Intangible assets like patents are amortized over the shorter of their legal life or estimated useful life. In this case, the useful life is 10 years, which is shorter than the legal life of 15 years. The amortization period is 10 years. Since the patent was purchased on November 1, Year 1, only two months of amortization should be recognized in Year 1. Annual amortization = $300,000 / 10 years = $30,000. Year 1 amortization = $30,000 * (2/12) = $5,000.
Why the other options are wrong
- A. This would be $30,000 * (2.4/12), which is incorrect for two months.
- B. This is the full annual amortization, not prorated for the two months of ownership in Year 1.
- D. Intangible assets with finite lives are amortized; only indefinite-lived intangibles are not amortized.
Intangible Asset Amortization
Amortization of intangible assets with finite lives involves systematically allocating their cost over their useful economic life, typically the shorter of legal or estimated useful life.
- Applies to intangibles with finite useful lives.
- Amortized over the shorter of legal or estimated useful life.
- Straight-line method is commonly used.
Memory trick: Invisible assets, visible cost spread: shorter life, straight line ahead.