CPA Exam - FAR (Financial Accounting and Reporting)Select TransactionsEasy
A company acquired a patent for $90,000 on January 1, Year 1. The patent has a legal life of 15 years and an estimated economic useful life of 10 years. What is the book value of the patent on December 31, Year 3?
- A$54,000
- B$81,000
- C$63,000
- D$72,000
Show answer & explanationAnswer & explanation
Correct answer: C. $63,000
Intangible assets like patents are amortized over the shorter of their legal life or economic useful life. In this case, the economic useful life of 10 years is shorter than the legal life of 15 years. Annual amortization is $90,000 / 10 years = $9,000. For three years (Year 1, Year 2, Year 3), total accumulated amortization is $9,000 * 3 = $27,000. The book value at December 31, Year 3, is $90,000 - $27,000 = $63,000.
Why the other options are wrong
- A. This would be the book value after four years of amortization based on a 10-year life.
- B. This would be the book value after one year of amortization based on a 10-year life.
- D. This might result from amortizing over a 12.5-year life or making a calculation error.
Amortization of Intangible Assets
The systematic expensing of the cost of an intangible asset over its useful life, similar to depreciation for tangible assets.
- Amortized over the shorter of legal life or economic useful life.
- Goodwill is not amortized but tested for impairment annually.
- Straight-line method is typically used unless another method is more appropriate.
Memory trick: Intangible's Value: Life's shorter path, then amortize fast.