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A pharmaceutical company purchased a patent for a new drug October 1 for $8,000,000. The remaining legal life of the patent is 10 years but the firm only expects to benefit from the patent for 5 years. No residual value is expected. Assuming the straight-line method is used, what is the amortization expense, if any, for the current accounting period (year) ending on 12/31

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Answer: $400,000

Explanation:

When calculating the amortization of a patent, we either use the legal life or the useful life depending on which is shorter which in this case is the useful life.

Annual Amortization;

= (Cost - Salvage value) / 5 years

= (8,000,000 - 0) / 5

= $1,600,000

Patent was purchased October 1. October to December is 3 months.

Depreciation for the year is therefore;

= 1,600,000 * 3/12

= $400,000

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