FAR Question about intangibles amortization

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  • March 16, 2018 at 3:03 pm #1738725
    Jacqueline
    Participant

    I just saw one Far question about patent amortization.
    It says that company A purchased a patent for $60,000. The patent has a legal life of 5 year, but they have option to renew the patent with a small cost. The patent will generate benefit for 20 years,but company A plan to sell it at the end of 3rd year. What is the current year amortization expense.

    So I understand that the amortization period should be the lower of legal life or economic life. And company A has no intent to renew the patent. So should I use 5 year instead of 20 years? Could anyone explain to me in detail please?

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  • March 16, 2018 at 3:22 pm #1738760
    DoubleBogey
    Participant

    I think it would be 5 years because any extension would require an extra cost.

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    March 16, 2018 at 4:09 pm #1738796
    MeanJoe
    Participant

    I would disagree.

    Since the patent can be renewed for a small cost (not substantial) than the amortization would be the economic benefit of the patent, 20 years.

    The part I am unsure about would be the decision to sell the patent after the 3rd year.

    I still think it would be amortized over the patents economic benefit life of 20 years.

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    March 16, 2018 at 4:46 pm #1738812
    aaronmo
    Participant

    Just to further throw some juice in the gumbo, I think for tax, it's 15 years 😉

    My opinion…for the sake of this question…it's the 20 yr figure. Intent isn't the same as doing it…and you don't hasten depreciation on an asset you're going to sell. Plus 20 yrs is the most conservative. To me, this goes by the contract with he patent, and if the renewal is a formality, you use the longer life.

    My experience with the CPA exam/accounting classes…when in doubt, be conservative.

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    March 16, 2018 at 10:30 pm #1738958
    Anonymous
    Inactive

    Wait, was this from an actual exam?

    But I'd go with legal life; renewal option is only a factor if it's indefinite (i.e. not amortized at all).

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