On December 1, 2015, Lavender Manufacturing Company (a corporation) purchased an

Question

On December 1, 2015, Lavender Manufacturing Company (a corporation) purchased another company’s assets, including a patent. The patent was used in Lavender’s manufacturing operations; $49,500 was allocated to the patent, and it was amortized at the rate of $275 per month. On July 30, 2017, Lavender sold the patent for $95,000. Twenty months of amortization had been taken on the patent. What are the amount and nature of the gain Lavender recognizes on the disposition of the patent? Write a letter to Lavender, discussing the treatment of the gain. Lavender’s address is 6734 Grover Street, Boothbay Harbor, ME 04538. The letter should be addressed to Bill Cubit, Controller.

**Do not write a letter, just explain the treatment**

Explanation / Answer

Gain On Sale of Patent = Sales Price - (Purchse Price - 275 Per Month * 20 Month)

= $ 95,000 - ($ 49,500 - $ 5,500)

= $ 95,000 - $ 44,000

= $ 51,000

$ 51,000 and Gain under section 1231 of the Federal Tax will be recognizes on the disposition of the patent under which the gain will be treated as ordinary income but tax would be paid as per the capital gain transaction.

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