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Subject Topic: Need help with this patent MCQ... (Topic Closed Topic Closed) Post ReplyPost New Topic
  
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empak
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Posted: 18 Jan 2012 at 17:09 | IP Logged  

Hy. Corp. bought Patent A for $40,000 and Patent B for $60,000. Hy also paid acquisition costs of $5,000 for Patent A and $7,000 for Patent B. Both patents were challenged in legal actions. Hy paid $20,000 in legal fees for a successful defense of Patent A and $30,000 in legal fees for an unsuccessful defense of Patent B. What amount should Hy capitalize for patents?

a. $162,000
b. $112,000
c. $65,000
d. $45,000

The answer, according to Becker, is $65,000 (Patent A's purchase price + its acquisition costs + its legal fees for a successful defense).

I thought the answer was $132,000 (Patent A's $65,000 + Patent B's purchase price & acquisition costs), but I'm wrong according to Becker. Why aren't the other costs for Patent B, excluding the unsuccessful defense (which is expensed), capitalized as well? Does the unsuccessful defense mean that Patent B is no longer useful and therefore expensed in its entirety? Any help would be appreciated. :)

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nambivar
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Posted: 18 Jan 2012 at 19:44 | IP Logged  

1. I found useful info from this site: http://www.pwc.com/en_TR/TR/publications/industrial/pharma/p ublished/Med_Tech_US_GAAP_Interactive_booklet.pdf
In page 14 or 16 of this, we find: ""Statement of Financial Accounting Concepts No. 6, paragraph 247, states that “… the legal and other costs of successfully defending a patent from infringement are ‘deferred legal costs’ only in the sense that they are part of the cost of retaining and obtaining the future economic benefit of the patent.”
AICPA Technical Practice Aids, Technical Questions and Answers Section 2260, Other Assets, states, “If defense of a patent lawsuit is successful, costs may be capitalized to the extent of an evident increase in the value of the patent. Legal costs that relate to an unsuccessful outcome should be expensed.”  ""
From the above, we understand that the expenses in defending unsuccessfully a patent should be expensed.
2. Once the above is clear, we understand that it makes no sense to capitalize the cost of the patent whose ownership/ benefit etc the company has lost. So the cost of patent B, cost of acquiring it and related expenses are also expensed.
3. The question asks us "what is the amount to be capitalized". Obviously it is the total amount pertaining to Patent A.

Hope the above helps.
----
Passed B, F: 04/11, R: 07/11; A: 11/11
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empak
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Posted: 18 Jan 2012 at 23:45 | IP Logged  

Yep, thank you very much. Passmaster is awful at explaining answers.
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