When Patent is amortized, the credit is usually made to Group of answer choicesAn accumulated depreciation accountAn accumulated amortization accountThe patent accountAn expense account
Question
When Patent is amortized, the credit is usually made to Group of answer choicesAn accumulated depreciation accountAn accumulated amortization accountThe patent accountAn expense account
Solution
When a patent is amortized, the credit is usually made to an accumulated amortization account.
Here's the step by step process:
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Determine the initial cost of the patent. This is usually the cost to acquire the patent or the cost to defend it in court.
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Determine the useful life of the patent. This is usually the legal life of the patent or the period over which the patent is expected to contribute to future cash flows.
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Divide the initial cost of the patent by its useful life. This gives you the annual amortization expense.
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Each year, debit (increase) the amortization expense account and credit (increase) the accumulated amortization account by the annual amortization expense.
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The accumulated amortization account is a contra asset account that reduces the carrying value of the patent on the balance sheet. Over time, the patent's carrying value will be reduced to zero.
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The amortization expense is reported on the income statement and reduces the company's net income.
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