Early in January, 2000, Vars Co

question 193

Essay

Early in January, 2000, Vars Co. purchased a patent for a new consumer product for $540,000. At the time of the purchase, the patent was valid for fifteen years. Due to the competitive nature of the product, however, the patent was estimated to have a useful life of only 10 years. During 2004, the product was permanently removed from the market under governmental order because of a potential health hazard present in the product. Calculate the amount Vars should charge to expense in 2004, assuming amortization is only recorded at the end of the fiscal year.

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Definitions:

Equivalent Units

A concept used in cost accounting to normalize units of production for inventory costing purposes, taking into account partially completed units.

Work In Process

Inventory items that are in the production process but have not yet been completed or transformed into finished goods.

Conversion Costs

These are the combined costs of direct labor and manufacturing overhead that are incurred to convert raw materials into finished goods.

Equivalent Units

A concept used in cost accounting to express the amount of work done on unfinished goods in terms of completed units of output.