Question 1

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.

What gain or loss should Sunset recognize on the sale of the patent?

Accepted Answer

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.

Question 2

What mistakes do candidates make on this CPA question?

Accepted Answer

Using legal life instead of useful life for amortization, not calculating accumulated amortization correctly, or using original cost instead of book value

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?

How to approach this question

Full Answer

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Practice the full CPA FAR Practice Exam 2

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