19. On June 30, 2016, Mobley C

19. On June 30, 2016, Mobley Corporation acquired a patent for$4.10 million. The patent was estimated to have an eight-year lifeand no residual value. Mobley uses the straight-line method ofamortization for intangible assets. At the beginning of January2018, Mobley successfully defended its patent against infringement.Litigation costs totaled $660,000.

Required: 1. Calculate patent amortization for 2016 and2017.

2. Prepare the journal entry to record the 2018 litigationcosts.

3. Calculate amortization for 2018.

4-a. Prepare the journal entry to record the 2018 litigationcosts and calculate amortization for 2018, assuming that Mobleyprepares its financial statements according to InternationalFinancial Reporting Standards (IFRS).

4-b. Calculate amortization for 2018 under IFRS.

Answer:

1 Calculation of Patent Amortization under straight line method:
Cost of the patent = $ 4100000
Useful Life = 8 years
Residual value = Nil
Patent Amortization per year under straight line method
(Cost of the asset – Residual Life) / useful Life
(4100000 – 0) / 8 = $512500
Particulars $
Cost of the Patent as on June 30 2016 4100000
Less: Patent Amortization for the year 2016 -256250
Written down Value as on Jan 1′ 2017 3843750
Less: Patent Amortization for the year 2017 -512500
Written down Value as on Jan 1′ 2018 3331250
2 Under US GAAP, legal fees and other costs incurred in successfullydefending a patent lawsuit can be capitalized only when suchsubsequent expenditure, after the asset has been acquired, wouldenable (although such costs has been incurred to establish theownership right of the asset in the lawsuit) the patent togenerate future economic benefits in excess of the originallyassessed standard of performance. Thus the legal costs incurred bythe company in the given case will be expenses and will be chargedto the Income statement as it has not generated any future benefitin excess of the originally assessed performance of the asset andhence does not meet the recognition criteria under the USGAAP.
Therefore, the journal entry that would be passed for thelitigation cost of $ 660,000 will be:
Date Account Title Debit $ Credit $
LitigationExpense           660000
        Cash                       660000
3 Since the Patent value does not change due to the litigationcost,
the Patent Amortization for the year 2018 will be same as $512500
4 Under IFRS, the infringement litigation cost will be capitalized onthe ground that it was incurred to defend the title of the patentand therefore the ownership of the intangible asset.
a Particulars $
Cost of the Patent as on June 30 2016 4100000
Less: depreciation for the year 2016 -256250
Written down Value as on Jan 1′ 2017 3843750
Less: depreciation for the year 2017 -512500
Written down Value as on Jan 1′ 2018 3331250
Add: Cost of litigation against infringement 660000
Book Value as on Jan 1 2018 3991250
Less: Patent Amortization for the year 2018 -665208
Note: Patent Amortization per year after 2017
(Revised Cost – Residual Value)/ Remaining useful Life
(3991250 – 0) / 6 = $ 665208
b Journal Entry for recording litigation costs
Date Account Title Debit $ Credit $
Patent                 665208
     Cash               665208
(being litigation cost incurred capitalized)

 
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