ExpertHard1 markMultiple Choice
CPA · Question 48 · Area II: Balance Sheet Accounts
Sunset Corp. purchased a patent for $360,000 on January 1, Year 1. The patent has a legal life of 20 years and an estimated useful life of 12 years. On January 1, Year 4, Sunset sells the patent for $285,000.<br/><br/>What gain or loss should Sunset recognize on the sale of the patent?
Sunset Corp. purchased a patent for $360,000 on January 1, Year 1. The patent has a legal life of 20 years and an estimated useful life of 12 years. On January 1, Year 4, Sunset sells the patent for $285,000.<br/><br/>What gain or loss should Sunset recognize on the sale of the patent?
Answer options:
A.
$75,000 loss
B.
$15,000 gain
C.
$15,000 loss
D.
$30,000 gain
How to approach this question
Calculate annual amortization using the shorter of legal life or useful life. Determine book value at sale date (cost minus accumulated amortization), then compare to sale proceeds for gain/loss.
Full Answer
B.$15,000 gain✓ Correct
Under ASC 350, intangible assets are amortized over the shorter of legal or useful life. Annual amortization = $360,000 ÷ 12 years = $30,000. After 3 years, accumulated amortization = $90,000. Book value = $360,000 - $90,000 = $270,000. Gain = $285,000 - $270,000 = $15,000.
Common mistakes
Using legal life instead of useful life for amortization, not calculating accumulated amortization correctly, or using original cost instead of book value
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