On January 3, 2021, Tracer Incorporated purchased a patent for $450,000 to manufacture a new type of chair. The patent has a remaining legal

On January 3, 2021, Tracer Incorporated purchased a patent for $450,000 to manufacture a new type of chair. The patent has a remaining legal life of 12 years. Tracer plans to manufacture the chair for eight years and then sell the patent for $50,000. The company amortized intangible assets using the straight-line method. On December 29, 2023, Tracer decides to sell the patent for $325,000. Assuming the company has a December 31 year-end, what is the gain or loss recorded on the sale of the patent

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  1. Answer:

    $25,000 gain

    Explanation:

    For computing the gain or loss, first we have to determine the depreciation expense so that we can find the book value of an asset

    So, under the straight-line method, the depreciation expense would be

    = (Original cost – residual value) ÷ (useful life)  

    = ($450,000 – $50,000) ÷ (8 years)  

    = ($400,000) ÷ (8 years)  

    = $50,000

    For three years, the depreciation would be

    = $50,000 × 3 years

    = $150,000

    In this method, the depreciation is same for all the remaining useful life

    Now the book value would be

    = Acquired value of an asset – accumulated depreciation  

    = $450,000 – $150,000

    = $300,000

    So, the gain would be

    = Sale value – book value

    = $325,000 – $300,000

    = $25,000

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