Van Frank Telecommunications has a patent on a cellular transmission process. Th
ID: 2480165 • Letter: V
Question
Van Frank Telecommunications has a patent on a cellular transmission process. The company has amortized the $13.50 million cost of the patent on a straight-line basis since it was acquired at the beginning of 2012. Due to rapid technological advances in the industry, management decided that the patent would benefit the company over a total of six years rather than the nine-year life being used to amortize its cost. The decision was made at the end of 2016 (before adjusting and closing entries).
What is the appropriate adjusting entry for patent amortization in 2016 to reflect the revised estimate.
Van Frank Telecommunications has a patent on a cellular transmission process. The company has amortized the $13.50 million cost of the patent on a straight-line basis since it was acquired at the beginning of 2012. Due to rapid technological advances in the industry, management decided that the patent would benefit the company over a total of six years rather than the nine-year life being used to amortize its cost. The decision was made at the end of 2016 (before adjusting and closing entries).
Explanation / Answer
Answer
The company has amortized the $13.50 million cost of the patent on a straight-line basis since it was acquired at the beginning of 2012. The decision was made at the end of 2016 (before adjusting and closing entries) so it is assumed that amortisation of patent for Year 2016 has not been provided.
Yearly amortisation is 3.375 million [13.5 million / 4 years (2012-2015)].
Management decided that the patent would benefit the company over a total of six years rather than the nine-year life being used to amortize its cost.
The value of the patent will be $ 30.375 million (3.375 million*9 years).
Revised Yearly amortisation on patent will be $ 5.0625 million (30.375 million/6 years)
Total new amortisation for 4 years (2012 -2015) = $ 20.25 million ($ 5.0625 million * 4).
Adjustment for excess amortisation to be provided is $ 6.75 million ($ 20.25 million - $ 13.5 million).
Adjustment entry for 4 years (2012-2015) in 2016
Amortisation on Patent A/c Dr. $ 6.75 million
To Patent A/c Cr. $ 6.75 million
Amortisation for 2016
Amortisation on Patent A/c Dr. $ 5.0625 million
To Patent A/c Cr. $ 5.0625 million
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