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On January 1, Year 1, Lowing Company acquired a patent from Generics Research Corporation for $3 million. The legal life of the patent is 20 years, but Lowing expects to use it for 5 years. Pawson Company has committed to purchase the patent from Lowing for $500,000 at the end of that 5-year period. Lowing uses the straight-line method to amortize intangible assets with finite useful lives. What is the amount of amortization expense each year

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jepessoa

Answer:

patent amortization expense per year = $500,000 per year

Explanation:

patent amortization expense per year = depreciable value / useful life of the intangible asset

  • depreciable value = purchase cost - salvage value = $3,000,000 - $500,000 = $2,500,000
  • useful life of the patent = 5 years (the legal life is different than the useful life)

patent amortization expense per year = $2,500,000 / 5 years = $500,000 per year

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