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Question: (Accounting for Patents) During 2013, Winston Corporation spent \(170,000 in research and development costs. As a result, a new product called the New Age Piano was patented. The patent was obtained on October 1, 2013, and had a legal life of 20 years and a useful life of 10 years. Legal costs of \)18,000 related to the patent were incurred as of October 1, 2013.

Instructions

(a) Prepare all journal entries required in 2013 and 2014 as a result of the transactions above.

(b) On June 1, 2015, Winston spent $9,480 to successfully prosecute a patent infringement suit. As a result, the estimate of useful life was extended to 12 years from June 1, 2015. Prepare all journal entries required in 2015 and 2016.

(c) In 2017, Winston determined that a competitor’s product would make the New Age Piano obsolete and the patent worthless by December 31, 2018. Prepare all journal entries required in 2017 and 2018.

Step by step solution

01

Meaning of Patents

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.

02

Preparing journal entry (a)

Date	Particular	Debit ($)	Credit ($)
2013	Research and development expense	170,000
	Cash		170,000
2013	Patents	18,000
	Cash		18,000
2013	Amortization expense	450
	Patents		450
2014	Amortization expense	1,800
	Patents		1,800

Working notes:

Calculation ofamortization expenses in 2013

$$\begin{gathered} \text{Amortization}\text{expense}=\frac{\text{Legal}\text{cost}}{\text{Useful}\text{life}}×\text{Total}\text{month} \\ =\frac{\$18,000}{10}×\frac{3}{12} \\ =\$450 \end{gathered}$$

Calculation ofamortization expenses in 2014

$$\begin{gathered} \text{Amortization}\text{expense}=\frac{\text{Legal}\text{cost}}{\text{Useful}\text{life}} \\ =\frac{\$18,000}{10} \\ =\$1,800 \end{gathered}$$

03

Preparing journal entry (b)

Date	Particular	Debit ($)	Credit ($)
2015	Patents	9,480
	Cash		9,480
2015	Amortization Expense	1,940
	Patents		1,940
2016	Amortization Expense	2,040
	Patents		2,040

Working Notes:

Calculation of patents amount from Jan. 1, 2015, to June 1, 2015

$$\begin{gathered} \text{Patent}=\frac{\text{Legal}\text{cost}}{\text{Useful}\text{life}}×\text{Total}\text{month} \\ =\frac{\$18,000}{10}×\frac{5}{12} \\ =\$750 \end{gathered}$$

Calculation of patents amount from June 1, 2015, to Dec. 31, 2015

$$\begin{gathered} \text{Patents}=\frac{\left(\text{Legal}\text{cost}-\text{Total}\text{amortization}\text{expense}-\text{Patent}\text{amount}+\text{Patent}\text{cash}\right)}{\text{Useful}\text{life}}×\text{Total}\text{month} \\ =\frac{\left(\$18,000-\$450-\$1,800-\$750+9,480\right)}{12}×\frac{7}{12} \\ =\frac{\$24,480}{12}×\frac{7}{12} \\ =\$1,190 \end{gathered}$$

04

Preparing journal entry (c)

Date	Particular	Debit ($)	Credit ($)
2017 and 2018	Amortization Expense	10,625
	Patents		10,625

Working notes:

Calculation of patents amount

$$\begin{gathered} \text{Patents}\text{amount}=\frac{\text{End}\text{patents}-\text{Begining}\text{patents}-\text{Amortization}\text{expense}}{\text{Year}} \\ =\frac{\$24,480-\$1,190-\$2,040}{2} \\ =\$10,625 \end{gathered}$$

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