On September 30, 2016, Leeds LTD. acquired a patent in conjunction with the purc

Question

On September 30, 2016, Leeds LTD. acquired a patent in conjunction with the purchase of another company. The patent, valued at $4 million, was estimated to have a 10-year life and no residual value. Leeds uses the straight-line method of amortization for intangible assets. At the beginning of January 2018, Leeds successfully defended its patent against infringement. Litigation costs totaled $200,000.

Required:
1. Calculate amortization of the patent for 2016 and 2017.
2. Prepare the journal entry to record the 2018 litigation costs.
3. Calculate amortization for 2018.
4a. Prepare the journal entry to record the 2018 litigation costs, assuming that Leeds prepares its financial statements according to IFRS.
4b. Calculate amortization for 2018, assuming that Leeds prepares its financial statements according to IFRS.

Explanation / Answer

1)

Amortization of the patent for 2016 = (4000000/10) *3/12 = 100000

Amortization of the patent for 2017 = (4000000/10) *12/12 = 400000

2)

Intangible assets - Patent Dr 200000

Cash Cr 200000

3)

Carrying value of patent as on January 2018 = 4000000 - 400000 - 100000 + 200000 = 3700000

Remaining life of patent = 10 years - 1.25 years = 8.75 years

Amortisation for 2018 = 3700000/8.75 = 422857

4a)

Litigation Expense Dr 200000

Cash Cr 200000

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