Missy Printers (MP) manufactures printers. Assume that MP recently paid $ 250 comma 000 for a patent on a new laser printer. Although it gives legal protection for 20 years, the patent is expected to provide a competitive advantage for only ten years. Requried:
a. Assuming the straight-line method of amortization, make journal entries to record (a) the purchase of the patent and (b)amortization for year 1.

b. After using the patent for four years, MP learns at an industry trade show that another company is designing a more efficient printer. On the basis of this new information, MP decides, starting with year 5, to amortize the remaining cost of the patent over two remaining years, giving the patent a total useful life of six years. Record amortization for year 5.

Explanation:

Note that the patent will be amortized over the years that it gives a competitive advantage .

Patent cost =250,000

Useful life - 10 years

Journal entry

a)Account title                             Debit                  Credit

Purchase

Patent (Non current asset)    250,000

Cash                                                                  250,000

First year amortization

Amortization expenses        25,000

(250000/10)

Patent                                                               25,000

b)

Amortization for the fifth year

Cost of patent = 250,000

Initial estimated useful life = 10

Annual amortization = 250,000/10 =25,000

First 4 years amortization = 25,000*4 = 100,000

Carrying value at the beginning of 5th year = 150,000 (250,000-100,000)

New estimated life = 2 years

Depreciation in the fifth year = 150,000/2 = 75,000

Journal entry

Account  title                                    Debit                Credit

Amortization expenses                   75,000

Patent                                                                            75,000

for storing the moneys