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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Mystic Pizza Company purchased a patent from Prime Pizza Plus on January 1, 2019, for $72,000. The patent has a remaining legal life of 9 years. Prepare the journal entries to record the acquisition and the amortization for 2019, assuming Mystic Pizza amortizes its patents using the straight-line method over the life of the asset.

To determine

Prepare the necessary journal entries for the given transaction.

Explanation

Amortization expense: The expense which reflects the usage of intangible asset by the way of reducing the cost of the asset for the estimated useful definite life, is referred to as amortization expense.

Formula for amortization expense:

Amortization expense=Cost of intangible asset×1Useful life

Patent: Patent is a right that is exclusively granted by the Government to an individual or firm to process or design, to make, use or sell its invention for a limited period. It protects the right of the inventor from doing so by any other individual till the granted period expires.

Prepare journal entries for the acquisition of patent for 2019:

DateAccounting Title and ExplanationPost Ref.Debit ($)Credit ($)
January 1, 2019Patent 72,000 
 Cash   72,000
 (To record the purchase of patent)   

Table (1)

  • A Patent is an asset account and it is increased. Therefore, debit patents account with $72,000
  • Cash is an asset account and it is decreased. Therefore, credit cash account with $72,000

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