Accounting for Intangible Assets}

On January 1, 2011, Technocraft Inc. acquired a patent that was used for manufacturing semiconductor-based electronic circuitry. The patent was originally recorded in Technocraft's ledger at its cost of \(\$ 1,596,000\). Technocraft has been amortizing the patent using the straight-line method over an estimated economic life of 10 years. Residual value was assumed to be zero. Technocraft sued another company for infringing on its patent. As of January 1, 2018, Technocraft spent \(\$ 122,500\) on this suit and won a judgment to recover the \(\$ 122,500\) plus damages of \(\$ 500,000\). The company that was sued paid the \(\$ 622,500\).

Required:

1. Compute and record amortization expense on the patent for 2017 (prior to the lawsuit).

2. Prepare the necessary journal entry on January 1, 2018, to record the expenditure of \(\$ 122,500\) to defend the patent.

3. Prepare the journal entry to record the award of \(\$ 622,500\) on January 1,2018 , 4. Indicate the entry you would have made had Technocraft lost the suit. (Note: Assume that the patent would be valueless if Technocraft had lost the suit.)
5. What are the financial statement effects of capitalizing or expensing the cost of defending the patent?

\section*{Problem