CPA Exam - FAR (Financial Accounting and Reporting)Financial ReportingHard
A publicly traded company, Stellar Corp., incurred $1,000,000 in legal fees and other direct costs to successfully defend its patent against infringement during the current year. The patent has a remaining useful life of 10 years. How should Stellar Corp. account for these legal fees?
- AExpense the $1,000,000 as incurred
- BCapitalize the $1,000,000 and amortize it over the patent's original legal life only
- CCapitalize the $1,000,000 and amortize it over the shorter of 10 years or the patent's original legal life
- DCapitalize the $1,000,000 and amortize it over 10 years
Show answer & explanationAnswer & explanation
Correct answer: D. Capitalize the $1,000,000 and amortize it over 10 years
Costs incurred to successfully defend an intangible asset like a patent are capitalized as they enhance the future economic benefits of the asset. These capitalized costs should then be amortized over the asset's remaining useful life, which is 10 years in this case. The original legal life is irrelevant if the remaining useful life is shorter or the same.
Why the other options are wrong
- A. Legal fees to successfully defend a patent are capitalized, not expensed, because they preserve future economic benefits.
- B. Amortization should be over the shorter of the remaining useful life or remaining legal life, not just the original legal life.
- C. The amortization period is the shorter of the remaining useful life or the remaining legal life. Given the remaining useful life is 10 years, and the original legal life is 17 years, the remaining useful life is the appropriate amortization period if it is shorter than the remaining legal life. However, since the question states 'remaining useful life of 10 years' and doesn't specify remaining legal life, the useful life is the appropriate period. This option introduces an unnecessary 'original legal life' vs 'remaining legal life' confusion.
Intangible Asset Defense Costs
Legal fees and other costs incurred to successfully defend an intangible asset (e.g., patent, trademark) are capitalized and amortized over the asset's remaining useful life.
- Only *successfully* defended costs are capitalized; unsuccessful defense costs are expensed.
- These costs extend or preserve the economic benefits of the existing intangible asset.
- Amortization period is the shorter of the remaining useful life or remaining legal life of the asset.
Memory trick: Defend Success, Capitalize Progress, Amortize Life.