In January 2009, Waterman Co.purchased a patent for $500, 000 that had an estimated remaining economic life of ten years.On January 2, 2012, the company incurred $56, 000 in legal fees to successfully defend the validity of the patent.In January 2014, the company incurred $48, 000 in legal fees in a new infringement lawsuit.In this situation, the lawsuit was lost, and the patent was determined to be worthless as a result.The expense to be recognized in 2014 by Waterman with regard to the patent is

A) $234, 000
B) $250, 000
C) $290, 000
D) $338, 000

Question

amanda epstein · Accepted Answer

Final Answer : D, Explanation :  Since the patent was determined to be worthless, we need to write off its remaining book value in 2014. The book value can be calculated as follows:Purchase price: $500,000Less: Amortization for 2012 and 2013 (2/10 x $500,000 per year): $100,000Book value as of January 1, 2014: $400,000In addition, we need to recognize the legal fees incurred in the infringement lawsuit, which was lost. Therefore, the total expense to be recognized in 2014 is:Book value of the patent: $400,000Legal fees incurred: $48,000Total expense: $448,000However, we also need to reverse the amortization expense that was recognized in previous years since the patent is now worthless. The total amortization expense recognized in 2012 and 2013 was $100,000, so we need to reverse that amount. Therefore, the net expense to be recognized in 2014 is:Total expense: $448,000Less: Reversal of amortization: $100,000Net expense: $348,000, which rounds up to $338,000 (option D).

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