Chapter 7, Problem 7.16E

1.

To determine

To Record: The purchase in 2015, amortization for the years 2015, 2016, and 2017, legal fees in 2017.

Explanation of Solution

Patent:

Patent is a right that is exclusively granted by the Government to an individual or firm to process or design, to make, use or sell its invention for a limited period. It protects the right of the inventor from doing so by any other individual till the granted period expires.

• Record the Purchase of patents:

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
2015	Patents		237,000
January 1	Cash			237,000
	(To record the purchase of patents.)

Table (1)

• Patents are an assets and increases due to purchase. Therefore, the Patents account increase by $237,000.
• Cash account decreases due to purchase of patents. Therefore, Cash account decreases by $237,000.

Amortization:

It is the process of allocating the value of the intangible assets over its estimated useful life.

• Record the amortization expense for December 31, 2015:

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
2015	Amortization expense (1)		39,500
December   31	Patents			39,500
	(To record the amortization expense.)

Table (2)

• Amortization expense is an expense and decreases the stockholders’ equity. Therefore, debit Amortization expense by $39,500.
• Patents are assets and decreases due to amortization expense. Therefore, the Patents account decrease by $39,500.
• Record the amortization expense for December 31, 2016.

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
2016	Amortization expense (1)		39,500
December   31	Patents			39,500
	(To record the amortization expense.)

Table (3)

• Amortization expense is an expense and decreases the stockholders’ equity. Therefore, debit Amortization expense by $39,500.
• Patents are assets and decreases due to amortization expense. Therefore, the Patents account decrease by $39,500.
• Record the Payment of legal fees:

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
2017	Patents		57,000
January	Cash			57,000
	(To record the payment made for legal fees.)

Table (4)

• Patents are assets and increases due to patent infringement suit. Therefore, the Patents account is increased by $57,000.
• Cash is decreased due to payment made for legal fees spent on account of infringement suit. Therefore, Cash account is decreased by $57,000.
• Record the amortization expense in the year 2017.

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
2017	Amortization expense (2)		53,750
December   31	Patents			53,750
	(To record the amortization expense.)

Table (5)

• Amortization expense is an expense and decreases the stockholders’ equity. Therefore, debit Amortization expense by $53,750.
• Patents are assets and decreases due to amortization expense. Therefore, the Patents account decrease by $53,750.

Working note 1

Determine the amortization expense for the year 2015 and 2016.

The amortization expense is determined as follows:

$\begin{array}{c}\text{Amortization expense = }\frac{\text{Purchase}\text{price}}{\text{Number of years}}\\ =\frac{\$237,000}{6}\\ =\$39,500\end{array}$ (1)

Determine the amortization expense for the year 2017.

The amortization expense for 2017 is determined as follows:

$\begin{array}{c}\text{Amortization expense =}\left(\frac{\begin{array}{l}\text{Purchase price – Amortization expense }\left(\text{2015}\right)\\ \text{–Amortization expense }\left(\text{2016}\right)\text{+Legal fees paid}\end{array}}{\text{Remaining years}}\right)\\ \text{=}\frac{\text{\$237,000 – \$39,500 – \$39,500 + 57,000}}{\text{4}}\\ \text{=\$53,750}\end{array}$ (2)

2.

To determine

the balance in the patent account at the end of 2017.

Explanation of Solution

Prepare T-account for Patent, to determine its balance at the end of 2020.

Patent
Particulars	Debit	Particulars	Credit
Purchase	237,000	Amortization (2015)	39,500
Legal fees	57,000	Amortization (2016)	39,500
		Amortization (2017)	53,750
		Balance c/d	161,250
Total	294,000	Total	294,000
Balance b/d	161,250

Table (6)

Thus, the ending balance of patent account at the end of 2020 is $161,250.