FAR · Select balance sheet accounts · 7 practice questions
Amortize patents over shorter life; capitalize defense costs
Capitalize the purchase price and successful defense, then amortize over the shorter of legal or useful life. Below: one scenario with reamortization, step-by-step calc.
Try one first
Hint
First decide which costs belong in the patent account, then determine the correct amortization period.
Answer C. The purchase price and successful legal defense costs are capitalized, so the patent's cost basis is $204,000 ($180,000 + $24,000). Amortize over the shorter of legal life (12 years) and useful life (8 years), so use 8 years: annual amortization = $204,000 ÷ 8 = $25,500. After one year (acquired Jan 1), carrying amount = $204,000 − $25,500 = $178,500.
Why not A: This reflects amortization over 8 years but ignores capitalizing the successful defense costs (180,000 ÷ 8 = 22,500; 180,000 − 22,500 = 157,500). Successful defense costs are capitalized and increase the base to $204,000.
Why not B: This assumes the legal fees were capitalized but amortization used the 12-year legal life (204,000 ÷ 12 = 17,000); the correct rule is to amortize over the shorter useful life when it is shorter than legal life.
Why not D: This is the capitalized cost without any amortization. Because the patent is finite-lived and was acquired on January 1, a full year of amortization must be recorded.
Worked example
On January 15, Year 1, Park Co. buys a patent for $300,000 and pays $15,000 in filing fees. The patent is ready for use on April 1, Year 1. Legal life is 10 years; expected useful life is 5 years. On July 1, Year 2, Park pays $30,000 to successfully defend the patent. Compute the carrying amount at December 31, Year 2.
| 1 | Build initial amortizable basisPurchase $300,000 + filing $15,000 | $315,000 |
| 2 | Year 1 amortization (placed in service Apr 1)$315,000 ÷ 5 years = $63,000 per year; 9/12 of Year 1 | $47,250 |
| 3 | Carrying amount at 12/31/Year 1$315,000 − $47,250 | $267,750 |
| 4 | Amortization Jan-Jun, Year 2 (old schedule)$63,000 × 6/12 | $31,500 |
| 5 | Carrying just before defense cost (7/1/Year 2)$267,750 − $31,500 | $236,250 |
| 6 | Add successful defense and reamortizeAdd $30,000 → new basis $266,250; remaining life 45 months; Jul-Dec amort = $266,250 ÷ 45 × 6 | $35,500 |
| 7 | Carrying amount at 12/31/Year 2$266,250 − $35,500 | $230,750 |
Park Co. reports the patent at $230,750 at December 31, Year 2.
Check: Year 2 amortization equals $31,500 for the first half under the old schedule plus $35,500 after reamortization, totaling $67,000; subtracting from $297,750 (12/31/Y1 carrying plus $30,000) gives $230,750.
Key points
- Use the shorter of legal life or useful life for finite-lived intangibles.
- Start amortization when the patent is placed in service; prorate partial periods as needed.
- Add successful defense costs to carrying amount and reamortize prospectively over the remaining useful life.
- Unsuccessful defense costs are expensed.
- Changes in useful life are changes in estimate; do not restate prior periods.
- Do not capitalize advertising, routine maintenance fees, or research costs.
How the exam traps you
- Amortizing over the legal term when management expects a shorter useful life. Always use the shorter of remaining legal life or expected useful life.
- Ignoring successful defense costs when computing amortization. Add successful defense costs to the patent’s carrying amount before reamortizing.
- Restarting amortization schedule retroactively after a life change. Treat life changes prospectively; reamortize the remaining carrying amount over the new remaining life.
- Beginning amortization on the purchase date when the asset was not ready for use. Begin amortization when the asset is placed in service and prorate for partial periods if required.
Question 2
| Intangible Asset | Cost | Useful Life |
|---|---|---|
| Patent (purchased Jan 1, Year 1) | $300,000 | 10 years |
| Customer list (purchased Jan 1, Year 1) | $150,000 | 5 years |
| Trademark (purchased Jan 1, Year 1) | $200,000 | Indefinite |
Hint
First classify each item (finite‑lived vs indefinite‑lived vs R&D expense). Remember that successful legal defense costs are capitalized to the intangible and amortized over the remaining life; R&D is expensed as incurred.
Answer B. Patent: original cost $300,000 with Year 1 amortization of $30,000 leaves $270,000 at Jan 1, Year 2. Capitalized legal fees of $45,000 on Jan 1, Year 2 are amortized over the remaining 9 years ($5,000 in Year 2), so Year 2 patent amortization = $30,000 + $5,000 = $35,000 and the Dec 31, Year 2 carrying amount = $270,000 + $45,000 - $35,000 = $280,000. Customer list: $150,000 less two years of $30,000 amortization = $90,000. Trademark: $200,000 (indefinite life, no amortization). Total = $280,000 + $90,000 + $200,000 = $570,000.
Why not A: This adds the $60,000 of R&D to intangibles (570,000 + 60,000). Under US GAAP research and development costs are expensed as incurred and are not capitalized as intangible assets.
Why not C: This assumes the $45,000 legal defense cost was expensed rather than capitalized. If those fees are expensed, the patent carrying amount at Dec 31, Year 2 would be $240,000 (270,000 - 30,000), giving total intangibles $240,000 + $90,000 + $200,000 = $530,000. Successful defense costs, however, should be capitalized and amortized over the remaining life.
Why not D: This combines two errors (expensing the defense fees and treating the trademark as amortizable). For example, expensing the $45,000 would reduce the patent to $240,000 and incorrectly amortizing the trademark could reduce it to $160,000, yielding $240,000 + $90,000 + $160,000 = $490,000. Both assumptions contradict the facts (defense was successful and trademark is indefinite-lived).
Question 3
Hint
Ask whether the expenditure creates or preserves future economic benefits of an existing patent, and then consider whether that patent is finite-lived.
Answer A. Costs of a successful legal defense that preserve the future economic benefits of an identifiable intangible asset (a patent) are capitalized and added to the asset's carrying amount. Because patents are normally finite-lived, the added costs are amortized over the patent's remaining useful life.
Why not B: Tempting because many legal costs are expensed as incurred, but when the legal fees result in a successful defense that preserves an existing patent's benefits, GAAP requires capitalization rather than immediate expensing.
Why not C: This confuses capitalization with indefinite-life treatment. A patent is generally a finite-lived intangible, so amounts capitalized to it are amortized over the remaining useful life.
Why not D: A successful defense protects the existing patent rather than creating a new separate intangible asset; therefore, the costs are added to the patent on the books, not recorded as a distinct asset with a new life.
Question 4
Hint
Identify which items are capitalizable versus expensed and which intangibles have finite lives; prorate amortization for assets placed in service partway through the year.
Answer D. Patent amortization = $600,000 ÷ 8 years = $75,000. Customer list amortization = $120,000 ÷ 10 years = $12,000. Capitalized software = under ASC 350-40, preliminary project stage costs are expensed as incurred and only the $300,000 of application development stage costs is capitalized; annual amortization = $300,000 ÷ 5 = $60,000, prorated for Oct 1-Dec 31 (3/12) = $15,000. Goodwill is indefinite-lived and not amortized. Total Year 1 amortization = $75,000 + $12,000 + $15,000 = $102,000.
Why not A: $90,000 equals the patent amortization plus the prorated software amortization (75,000 + 15,000) and omits the customer list amortization ($12,000). That would be incorrect because a purchased customer list with a determinable useful life must be amortized.
Why not B: $109,500 results from capitalizing all $450,000 of software costs (rather than only the $300,000 of application-development costs). That gives annual software amortization of $90,000 and a 3-month prorate of $22,500, which overstates amortization because preliminary project-stage costs must be expensed.
Why not C: $77,000 reflects amortizing the patent over its legal life (12 years → $50,000) instead of the shorter economic useful life (8 years → $75,000). GAAP requires amortization over the useful economic life when it is shorter than the legal life, so this understates expense.
Question 5
Hint
Focus on two separate issues: when amortization starts and which life controls for a finite-lived intangible.
Answer A. Finite-lived intangible assets are amortized over their useful life, not to exceed their legal life. Pica expects only 8 years of benefit, so the patent is amortized over 8 years. Amortization begins when the asset is ready for its intended use, which is July 1, Year 1.
Why not B: This is tempting because candidates may default to the patent's legal life, but GAAP requires amortization over the asset's useful life when it is shorter than the legal life. Pica's expected useful life is 8 years, so 12 years is incorrect.
Why not C: Some candidates mistakenly think amortization starts at the beginning of the next fiscal year. Amortization actually begins when the asset is ready for use, which the fact pattern states is July 1, Year 1, so delaying to January 1 is wrong.
Why not D: This choice combines two errors: using the legal life instead of the shorter useful life and delaying amortization until the next year. Under GAAP, amortization starts when the patent is ready for use and is based on the 8-year useful life here.
Question 6
Hint
Separate the costs that acquire or successfully defend the patent from the costs of research and routine upkeep.
Answer D. Lane should report the patent at $128,000, the $120,000 purchase price plus the $8,000 legal fees incurred to successfully defend the patent. Successful defense costs are capitalized as part of the patent; research costs and routine maintenance fees are expensed under U.S. GAAP and are not included.
Why not A: Tempting if a candidate capitalizes only the purchase price and forgets that costs to successfully defend an acquired patent are capitalized. Because the $8,000 defense was successful, it should be added to the patent's carrying amount.
Why not B: This option incorrectly capitalizes the $12,000 research costs (which are expensed under U.S. GAAP) and the $6,000 maintenance fees. Research and routine upkeep are not added to the patent asset.
Why not C: This reflects capitalizing routine maintenance fees in addition to the purchase price and defense costs. Routine maintenance fees are period expenses and should not be capitalized to the patent.
Question 7
Hint
Focus on whether the legal cost protects an existing finite-lived intangible asset and whether the defense was successful.
Answer D. Successful legal defense costs that preserve the economic benefits of a patent are capitalized as part of the patent's carrying amount. Because the patent is finite-lived, the increased carrying amount is amortized over the remaining useful life.
Why not A: Legal fees to defend an existing patent are not R&D. They relate to protecting an already recognized intangible asset and, if the defense is successful, are capitalized.
Why not B: This is tempting because no new asset was acquired, but a successful legal defense preserves the value and enforceability of the existing patent and therefore is capitalized rather than expensed.
Why not C: While capitalization is correct for a successful defense, the added costs become part of the patent's carrying amount and must be amortized over the remaining useful life even if the patent's legal term was not extended.
Common questions
Do I amortize a patent over the legal life or useful life?
Amortize straight-line over the shorter of the remaining legal life and the expected useful life.
When does amortization start for a purchased patent?
When the patent is ready for its intended use, not necessarily on the purchase date. Prorate for partial periods if applicable.
How are legal defense costs for a patent treated?
Successful defense costs are capitalized to the patent and amortized over the remaining useful life. Unsuccessful defense costs are expensed.
Practice FAR like the real exam
The free ChatCPA simulator: real exam layout, timed testlets, starting with a question on this topic. No account needed to start.
Open the free simulator →More on Intangible assets
Questions from the ChatCPA bank of 17,658 CPA exam questions, each with a written reason for every wrong answer. ChatCPA is built by Nicholas Miller, CPA (Oregon #14907). How these pages are made. Spot an error? Tell us.