Question

Question: Fields Laboratories holds a valuable patent (No. 758-6002-1A) on a precipitator that prevents certain types of air pollution. Fields does not manufacture or sell the products and processes it develops. Instead, it conducts research and develops products and processes which it patents, and then assigns the patents to manufacturers on a royalty basis. Occasionally it sells a patent. The history of Fields patent number 758-6002-1A is as follows.

Date	Activity	Cost
2008–2009	Research conducted to develop precipitator	$384,000
Jan. 2010	Design and construction of a prototype	87,600
March 2010	Testing of models	42,000
Jan. 2011	Fees paid engineers and lawyers to prepare patent application; patent granted June 30, 2011	59,500
Nov. 2012	Engineering activity necessary to advance the design of the precipitator to the manufacturing stage	81,500
Dec. 2013	Legal fees paid to successfully defend precipitator patent	42,000
April 2014	Research aimed at modifying the design of the patented precipitator	43,000
July 2018	Legal fees paid in unsuccessful patent infringement suit against a competitor	34,000

Fields assumed a useful life of 17 years when it received the initial precipitator patent. On January 1, 2016, it revised its useful life estimate downward to 5 remaining years. Amortization is computed for a full year if the cost is incurred prior to July 1, and no amortization for the year if the cost is incurred after June 30. The company’s year ends December 31.

Instructions

Compute the carrying value of patent No. 758-6002-1A on each of the following dates:

(a) December 31, 2011.

(b) December 31, 2015.

(c) December 31, 2018.

Short answer

Answer

1. Carrying value = $56,000
2. Carrying value = $78,000
3. Carrying value = $31,200

Step-by-step solution

Meaning of Patent 

Patents are the company's most valuable and intangible assets, granting specific legal rights to use a process or develop and sell a product. The value of patents rises or falls in accordance with the business's performance.

Computing carrying value of a patent on December 31, 2011 (a)

Costs to obtain patent Jan. 2011	$59,500
2011 amortization	(3,500 )
Carrying value, 12/31/11	$56,000

Prior to January 2011, all expenditures were spent for research and development purposes and were expensed as incurred in line with GAAP.

Working notes:

Calculating the amount of amortization

$\begin{array}{rcl}\text{Amortization}& =& \frac{\text{Patent}\text{application}\text{cost}}{\text{Useful}\text{life}}\\ & =& \frac{\$59,500}{17}\\ & =& \$3,500\\ & & \end{array}$

 Step 3: Computing carrying value of a patent on December 31, 2015 (b)

1/1/12 carrying value of patent	$56,000
2012 amortization $3,500
2013 amortization 3,500	(7,000)
	49,000
Legal fees to defend patent 12/13	42,000
Carrying value, 12/31/13	91,000
2014 amortization ($91,000 ÷ 14) 6,500
2015 amortization 6,500	(13,000)
Carrying value, 12/31/15	$78,000

The costs incurred in 2012 and 2014 were for research and development activities and were expensed as they were incurred.

Working notes:

Calculating the amount of amortization

$\begin{array}{rcl}\text{Amortization}& =& \frac{\text{Patent}\text{application}\text{cost}}{\text{Useful}\text{life}}\\ & =& \frac{\$59,500}{17}\\ & =& \$3,500\\ & & \end{array}$

Calculating the amount of amortization on 2014

$$\begin{gathered} \text{Amortization}=\frac{\text{Carrying}\text{value}\text{on}31/12/13}{\text{Useful}\text{life}} \\ =\frac{\$91,000}{14} \\ =\$6,500 \end{gathered}$$

Computing carrying value of a patent on December 31, 2018 (c)

1/1/16 carrying value	$78,000
2016 amortization ($78,000 ÷ 5) $15,600
2017 amortization 15,600
2018 amortization 15,600	(46,800)
Carrying value, 12/31/18	$31,200

Note: The legal costs in 2018 were expensed because the suit was unsuccessful.

Working notes:

Calculating the amount of amortization

$\begin{array}{rcl}\text{Amortization}& =& \frac{\text{Carrying}\text{value}\text{on}1/1/16}{\text{Useful}\text{life}}\\ & =& \frac{\$78,000}{5}\\ & =& \$15,600\\ & & \end{array}$