You have been examining the books of a new client. Included on their previously unaudited financial statements was a balance of $299,032 for a long-term Patent as of 12/31/2017. When examining the ledger, you found these entries:

• An “acquisition” entry of $274,982:
• Legal costs incurred in the preparation of the application for the patent: $6,450 during 2016
• Leal costs incurred in successfully defending the validity of the patent: $17,600 during 2017
• There have been no amortization expenses reported for the patent. There were no other entries to the account during 2018.

In discussions with the president of the firm, you learned that this patent was developed by an employee specifically hired to work on the development of the president’s initial concept for the product. After 3 years of work, the patent was granted at the end of 2016. The patented product has resulted in a 50% increase in sales from 12/31/2016 to 12/31/2018. The president expects the product to continue being very marketable over the company’s 3 year strategic plan from 2018 through 2020.

Instructions: As the outside auditor for the company, prepare a memo as of 12/31/2018 to the president of the company discussing:

• The GAAP rules governing the accounting of patents, using appropriate citations from the codification. (Provide the appropriate references to the FASB Codification. Do NOT copy and paste the codification sections.)
• The previous mistakes in accounting for the patent. Suggest correcting journal entries, if appropriate.

Answer rating: 100% (QA)

Companies record intangible assets at cost intangibles are categorized as having either a limited li... View the full answer