CSEET · Fundamentals of Accounting · Depreciation and Amortization
A company buys a patent for ₹6,00,000 with a legal life of 10 years, but it expects the patent to give benefits for only 6 years because of fast technology change. Using the straight-line method with nil residual value, the annual amortization is:
The annual amortization is ₹1,00,000. The patent should be written off over its expected useful life of 6 years, not its 10-year legal life, because useful life depends on expected utility to the enterprise. So ₹6,00,000 divided by 6 gives ₹1,00,000 each year.
- A₹60,000
- B₹1,00,000Correct
- C₹75,000
- D₹1,20,000
Explanation
Amortization is spread over the useful life, which is the period of expected utility to the enterprise, and not the legal life. Annual charge = 6,00,000 / 6 = ₹1,00,000. Using the legal life of 10 years gives ₹60,000, which is wrong because the useful life is shorter than the legal life.
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