Chapter 9: Q12SE (page 528)

Accounting for an intangible asset On October 1, 2018, Modern Company purchased a patent for $153,600 cash. Although the patent gives legal protection for 20 years, the patent is expected to be used for only eight years.
Requirements
1. Journalize the purchase of the patent.
2. Journalize the amortization expense for the year ended December 31, 2018. Assume straight-line amortization.

Short Answer

Expert verified

Amortization expenses of the patent for the year 2018 are equal to$4,800.

Step by step solution

Definition of Intangible Asset

The assets that increase the value of the business organization even without having any physical existence are known as intangible assets. Goodwill and patents are some of the intangible assets.

Journalize the purchase of the Patent as follows

Date	Particulars	Debit ($)	Credit ($)
1 Oct 2018	Patent	153,600
	Cash		153,600
	(To record purchase of Patent)

Journal entry for amortization expenses

Date	Particulars	Debit ($)	Credit ($)
31 Dec 2018	Amortization expenses – Patent	4,800
	Patent		4,800
	(To record the amortization expenses)

Working note: Calculation of amortization expenses

$\begin{matrix} Amortization expenses = \frac{Cost}{Useful life} \times \frac{3}{12} \\ = \frac{$ 153, 600}{8} \times \frac{3}{12} \\ = $ 4, 800 \end{matrix}$

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a	Purchase price of three acres of land	$86,000
b	Delinquent real estate taxes on the land to be paid by safe parking	6,300
c	Additional dirt and earth removing	8,400
d	Title insurance and the land acquisition	3,400
e	Fence around the boundary of the property	9,600
f	Building permit for building	900
g	Architect’s fee for design of building	20,100
h	Signs near the front of property	9,000
i	Material used to construct the building	217,000
J	Labor to construct the building	172,000
k	Interest cost on construction loan for the building	9,500
l	Parking lots on the property	29,400
m	Lights for parking lots	11,600
n	Salary of construction supervisor(80% to building; 20% to parking lot and concrete walks)	80,000
o	Furniture	11,700
p	Transportation of furniture from seller to the building	1,900
q	Additional fencing	6,900

Asset	Acquisition Date	Cost	Estimated Life	Estimated Residual value	Depreciation Method	Monthly Depreciation Expense
Canoes	Nov. 3, 2018	\(4,800	4 Years	\) 0	SL	$100
Land	Dec 1, 2018	85,000			n/a
Building	Dec 1, 2018	35,000	5 Years	5,000	SL	500
Canoes	Dec 2, 2018	7,200	4 Years	0	SL	150
Computer	Mar. 2, 2019	3,600	3 Years	300	DDB
Office Furniture	MAR. 3, 2019	3,000	5 Years	600	SL

Short Answer

Step by step solution

Definition of Intangible Asset

Journalize the purchase of the Patent as follows

Journal entry for amortization expenses

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