Calculating Patent Amortization Expense: A Detailed Explanation
Understanding Patent Amortization Expense Calculation
Patent Acquisition: ELO Corporation purchased a patent for $135,000 on September 1, 2019, with a useful life of 10 years.
Legal Defense Expenses: On January 1, 2021, ELO spent $33,000 to defend the patent successfully in a lawsuit, and they believe the remaining useful life is now 5 years.
To calculate the patent amortization expense for 2021, we need to consider the following:
- Unamortized Balance: The initial cost of the patent was $135,000 with a 10-year useful life. The annual amortization expense is $13,500. From Sept 1, 2019, to Dec 31, 2020, the total accumulated amortization is $22,500, leaving an unamortized balance of $112,500 as of January 1, 2021.
- Legal Expenses Adjustment: The additional $33,000 in legal expenses incurred will be added to the carrying amount of the patent, bringing the revised balance to $145,500 on January 1, 2021.
- Reassessed Useful Life: With the reassessed 5-year useful life from January 1, 2021, the new annual amortization expense for 2021 would be $29,100 ($145,500 / 5 years).
Therefore, by adjusting for legal expenses and the updated useful life, ELO Corporation should report a patent amortization expense of $29,100 for the year 2021.