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. During Year 1, Stellar Corp. acquired a patent for $500,000. It is estimated that the patent has a useful life of 10 years and no residual value. Stellar Corp. uses the straight-line method for amortization. What amount should Stellar Corp. report as amortization expense for the patent for the year ended December 31, Year 1?
- A$50,000
- B$100,000
- C$500,000
- D$0
Show answer & explanationAnswer & explanation
Correct answer: A. $50,000
Amortization expense for an intangible asset like a patent is calculated by dividing its cost by its useful life. In this case, the patent cost $500,000 and has a useful life of 10 years, resulting in $50,000 of amortization expense for the year.
Why the other options are wrong
- B. This would imply a useful life of 5 years, not 10.
- C. This would be the full cost of the patent, implying it was fully expensed or impaired within one year, which is not indicated.
- D. This would be incorrect as patents with a finite useful life must be amortized.
Intangible Asset Amortization
Intangible asset amortization is the systematic expensing of the cost of an intangible asset over its useful life.
- Applies to intangible assets with a finite useful life.
- Typically uses the straight-line method.
- The cost is spread over the asset's useful life, not its legal life if useful life is shorter.
Memory trick: Imagine a 'Patent Path' where you 'Amortize Annually' to spread the cost over time.