A company purchases a patent with a useful life of 10 years. The company depreciates the patent over 10 years rather than reporting the patent at its liquidation value.
Going Concern Assumption
Depreciating the patent over its useful life of 10 years rather than reporting it at its liquidation value is the correct accounting treatment in accordance with Generally Accepted Accounting Principles (GAAP).
The reason for this is that the patent is an intangible asset and according to GAAP, intangible assets with finite useful lives should be depreciated over their estimated useful lives. This means that the cost of the patent will be allocated over its useful life with an equal expense recognized each year.
Depreciation is the process of allocating the cost of an asset over its useful life. This allows the company to recognize the expense of the patent over the 10-year period it is expected to generate future economic benefits. Depreciation also matches the expense of the patent against the revenue it generates, providing a more accurate representation of the company’s financial performance.
On the other hand, reporting the patent at its liquidation value would not accurately reflect the company’s financial position since it does not take into account the economic benefits that the patent will generate over its useful life.
Therefore, by depreciating the patent over its useful life, the company follows GAAP guidelines and provides a more accurate financial representation of the patent’s value over its life.
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