Sheffield Corporation purchases a patent from Pharoah Company on January 1, 2017

Question

Sheffield Corporation purchases a patent from Pharoah Company on January 1, 2017, for $75,000. The patent has a remaining legal life of 16 years. Sheffield feels the patent will be useful for 10 years. Assume that at January 1, 2019, the carrying amount of the patent on Sheffield’s books is $60,000. In January, Sheffield spends $25,600 successfully defending a patent suit. Sheffield still feels the patent will be useful until the end of 2026.

Prepare the journal entries to record the $25,600 expenditure and 2019 amortization

Explanation / Answer

Journal entry for $25,600 expenditure in 2019:

Any cost incurred in the successful defence of a patent should be capitalized and amortised over the remaining useful life.

Remaining useful life=8 years

Amortization=($60,000+$25,600)/8

=$10,700

Journal entry for Amortization in 2019:

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