PATENT RIGHTS Flashcards
Patent rights - how amortization is recorded. .
Patent is an intangible asset. No physical existence. It is an exclusive right over an invention for a fixed period of time
Developing cost - is a current operating cost. The only expense that can be amortised and put on th BS is the legal expense for obtaining, defending and enforcing the patent.
Purchase price can be used to amortise over the useful life of the patent.
Eg
Purchase price on 1.4.1986 - 50,000
Developing cost - 35,000
Useful life - 10 years
What is the amortisation on 31.12.1986
(50,000/10) X 9/12 = 3750
Dr Patent rights ammortisation exp 3750
Cr Accumulated Ammortisation 3750
Legal cost to defend a patent how much to be expensed.
Eg - legal cost incurred to defend several patents include 500,000 in which 400000 is the cost associated with successful outcomes and 100,000 is the cost associated with unsuccessful outcomes.
Legal cost to defend a patent, if the defense is successful that is capitalised and it is included in the cost of patent itself. If it is unsuccessful it is expensed which is 100000..Litigation costs are capitalised if patent right is successfully defended. Otherwise litigation cost would be expensed.
Richter Corp uses the straight-line method for amortization and depreciation and that all amortization and depreciation is recorded on December 31 of each year. Richter uses separate general ledger accounts to record accumulated amortization for each intangible asset.
On April 1, year 1 Richter purchased a patent with a 10-year life for $50,000 from DD co. DD incurred costs of $35,000 developing the patent. Calculate the value of the patent to be recorded.
50,000
A patent is an exclusive right over an invention for a fixed period of time. It is considered an intangible asset; this is because a patent does not have physical substance, and provides long-term value to the owning entity.
If a company invests in creating a product or process for which it obtains a patent, the expense of developing the patented product or process is usually deducted as a current operating expense when it occurs. The only expenses that can be amortized and put on the balance sheet are the legal expenses related to obtaining, defending or enforcing the patent.
However, if a company has purchased a patent, the initial asset cost recognizable is the purchase price paid to acquire the patent. The company can amortize the cost over the remaining useful life of the patent.
Richter has purchased the patent for $50,000. Hence the asset value to be recognized is $50,000 which can be amortized over a period of 10 years.
Journal entry to record a purchase of an asset is:
Debit: Patent account $50,000
Credit: Cash account $50,000
Legal cost to file a patent - 5000
Equipment to be used on new product and future products - 100000 with 5 yr useful life
Labour and materials directly related to the prod - 15000
Cost of testing the prod prototype - 10000.
What are the costs related to R&D relating to new product this year.
Legal costs will be capitalised
1L will be capitalised as it is solely not used for this product or project but dep 5000 will be treated as R&D exp
Labour and material directly related to the product - 15000 included in R&D exp
The cost to test the equipment Will be included in the R&D cost 10000
So 20000+ 15000 + 10000
