CPA Exam - FAR (Financial Accounting and Reporting)Financial ReportingEasy
A publicly traded company, Stellar Corp., is preparing its financial statements for the year ended December 31, Year 1. On October 1, Year 1, Stellar Corp. acquired a patent for $500,000. The patent has a remaining legal life of 15 years and an estimated economic useful life of 10 years. What is the amortization expense for the patent for the year ended December 31, Year 1?
- A$50,000
- B$0
- C$12,500
- D$16,667
Show answer & explanationAnswer & explanation
Correct answer: C. $12,500
Amortization expense for patents is calculated over the shorter of the legal life or the economic useful life. In this case, the economic useful life of 10 years is shorter than the legal life of 15 years. The amortization is then recognized for the period the asset was held.
Why the other options are wrong
- A. This would be the full annual amortization if the asset was held for the entire year.
- B. Intangible assets with finite lives are amortized.
- D. This would be the amortization if the legal life was used and amortized for 3 months.
Intangible Asset Amortization
The systematic allocation of the cost of an intangible asset over its useful life.
- Amortized over the shorter of legal life or economic useful life.
- Only intangible assets with finite useful lives are amortized.
- Recognized as an expense on the income statement.
Memory trick: Intangibles' Value Fades Over Time, Shorter Life Wins.