At the beginning of the fiscal year, Andy Company purchased for $2,060,000 a patent that applies to the manufacture of a unique tamper-proof lid for medicine bottles. Andy incurred legal costs of $900,000 in successfully defending use of the lid by a competitor. Andy estimated that the patent would be valuable for at least ten years.
During the first two years of operations, Andy Company successfully marketed the lid. At the beginning of the third year, a study appeared in a consumer magazine showing that children could in fact remove the lid. As a result, all orders for the lids were cancelled, and the patent was rendered worthless. Prepare entries in journal form to record the following: (a) purchase of the patent; (b) successful defence of the patent; (c) amortization expense for the first year; and (d) write-off of the patent as worthless.
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