Intangibles Flashcards
(1 cards)
Arnold acquired a patent and recognized an intangible asset of $500,000 on 1/1/Year 1. The patent was amortized over a period of 10 years. During Year 2, a rival firm challenged the patent in a court of law. To defend the patent, Arnold incurred $10,000 in legal expenses. However, at the beginning of Year 3, he lost the case. What would be the implication of this event?
A debit of $410,000 on the income statement
When patents are subjected to legal cases, the cost of an unsuccessful defense, along with any amounts previously capitalized for the patent, is expensed in the period in which an unfavorable court decision is rendered.
The patent was being amortized since 1/1/Year 1. When the legal decision came through, amortization for 2 years was already recognized, i.e. $100,000. As such, the carrying value of the patent on the decision was $400,000. The entire $400,000 along with the $10,000 paid for an unsuccessful defense would be debited to the income statement
