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Nieland Industries had one patent recorded on its books as of January 1, 2020. This patent had a book value of $288,000 and a remaining useful life of 8 years. During 2020, Nieland incurred research and development costs of $96,000 and brought a patent infringement suit against a competitor. On December 1, 2020, Nieland received the good news that its patent was valid and that its competitor could not use the process Nieland had patented. The company incurred $85,000 to defend this patent. At what amount should patent(s) be reported on the December 31, 2020, balance sheet, assuming monthly amortization of patents?

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Answer:

The book value of patents should be reported at: $336,000.

Explanation:

Under U.S GAAP, R&D is not permitted to capitalized, thus R&D expenses incurred in the period is not relevant in calculation the book value of patent. On the other hand, successful ligation costs are allowed to be capitalized.

We have the book value of patents = Book value at opening of 2020 + Cost of successful patent infringement suit at 1st December 2020 - amortization of patents in the period of the year 2020;

where: Amortization of patents in the period = 12 months of book value at opening of 2020 amortization + 1 month of Cost of successful patent infringement suit = 288,000/ ( 8 x 12) x 12 + 85,000/( 1 + 7 x 12) x 1 = 37,000 ( as amortization is distributed equally on remaining useful life ( in months))

=> The book value at the end of 2020 = 288,000 + 85,000 - 37,000 = $336,000

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