Question

At the beginning of the year, a company purchases a patent for $2,400,000. The remaining legal life of the patent is 12 years, but management estimates that the patent will generate additional revenue for the next 16 years because there are currently no known competitors. At the end of the first year, management calculates straight-line amortization to be $150,000 ($2,400,000 ÷ 16 years). Which of the following statements is correct? A) Management should amortize the asset over 20 years. B) Management’s calculation is correct. C) Management should amortize the asset over 12 years. D) Management should not amortize the asset until its useful life becomes more evident.

          At the beginning of the year, a company purchases a patent for $2,400,000. The remaining legal life of the patent is 12 years, but management estimates that the patent will generate additional revenue for the next 16 years because there are currently no known competitors. At the end of the first year, management calculates straight-line amortization to be $150,000 ($2,400,000 ÷ 16 years).

Which of the following statements is correct?

A) Management should amortize the asset over 20 years.
B) Management’s calculation is correct.
C) Management should amortize the asset over 12 years.
D) Management should not amortize the asset until its useful life becomes more evident.

Added by Adriana T.

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