Peck Tech. purchased a patent at the beginning of 2011 for $400,000. The patent's legal life was 20 years, but economic benefits were expected for 10 years. Also, during 2011, Peck's incurred research and development costs of $200,000. The book value of the patents at December 31, 2011, is:
A) $400,000
B) $360,000
C) $350,000
D) $560,000

Question

Quizplus · Accepted Answer

The book value of the patent at the end of 2011 would be the initial $400,000 purchase price minus the amortization expense for the year. Since the economic benefits are expected for 10 years, the patent has a remaining useful life of 9 years (20 years legal life - 11 years already expired). Therefore, the amortization expense for 2011 would be $400,000/9 years = $44,444.44.

Book value at Dec 31, 2011 = $400,000 - $44,444.44 + $0 (since research and development costs cannot be capitalized) = $355,555.56, which rounds to $360,000.

Peck Tech Purchased a Patent at the Beginning of 2011 for for $400,000