Martinez, Inc. acquired a patent on January 1, 2017 for $40,000 cash. The patent was estimated to have a useful life of 10 years with no residual value. On December 31, 2018, before any adjustments were recorded for the year, management determined that the remaining useful life was 6 years (with that new estimate being effective as of January 1, 2018). On June 30, 2019, the patent was sold for $25,000.Required:Part a. Prepare the journal entry to record the acquisition of the patent on January 1, 2017.Part b. Prepare the journal entry to record the annual amortization for 2017.Part c. Compute the amount of amortization that would be recorded in 2018.Part d. Determine the gain (loss) on sale on June 30, 2019.Part e. Prepare the journal entry to record the sale of the patent on June 30,
2019.
What will be an ideal response?
Part a
| Patents | 40,000 |
| Cash | 40,000 |
| Amortization Expense ($40,000 × 1/10) | 4,000 |
| Accumulated Amortization (or Patent) | 4,000 |
Part c
2018 Revised amortization = Book value × (1 ÷ Remaining useful life)
2018 Revised amortization = (Cost ? Accumulated Amortization) × (1 ÷ Remaining useful life)
= ($40,000 ? $4,000) × 1/6 = $6,000
Part d
2019 Amortization = $6,000 × 6/12 (January 1 through June 30) = $3,000
Gain (loss) on disposal = Proceeds from sale ? Book value at time of sale
Gain (loss) on disposal = Proceeds from sale ? (Cost ? Accumulated amortization at time of sale)
= $25,000 ? [$40,000 ? ($4,000 + $6,000 + $3,000)] = ($2,000)
Part e
| Cash | 25,000 |
| Accumulated Amortization ($4,000 + $6,000 + $3,000) | 13,000 |
| Loss on Disposal | 2,000 |
| Patents | 40,000 |
| Cash | $25,000 |
| Loss on Disposal | 2,000 |
| Patent | 27,000 |
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