A company acquires a patent with an expiration date in six years for ¥100 million. The company assumes that the patent will generate economic benefits that will decline over time and decides to amortize the patent using the double-declining balance method. The annual amortization expense in Year 4 is closest to:

¥6.6 million.

¥9.9 million.

¥19.8 million.

Solution

B is correct. As shown in the following calculations, under the double-declining balance method, the annual amortization expense in Year 4 is closest to ¥9.9 million.

Annual amortization expense = 2 × Straight-line amortization rate × Net book value.

Amortization expense Year 4 = 33.3% × ¥29.6 million = ¥9.9 million.

I dont really understand the calculation. How did they come up with the NBV of 29.6 million? Thank you

Below are the calculations for Depreciation and Year-end Book Value for Years 1, 2, and 3. I trust that it’s self-explanatory, but I welcome any questions(s) you might have.

Year 1: Deprec. = 100 * .3333 = 33.3 | Year-end Book Value = 100.0 - 33.3 = 66.7
Year 2: Deprec. = 66.7 * .3333 = 22.2 | Year-end Book Value = 66.7 - 22.2 = 44.5
Year 3: Deprec. = 44.5 * .3333 = 14.8 | Year-end Book Value = 44.5 - 14.8 = 29.6
Year 4: etc.

I trust that this is helpful. Good luck on the exam!