Larry Was the Holder of a Patent on a Video

question 66

Essay

Larry was the holder of a patent on a video game.During 2012, he sold all substantial rights in the patent for $345,000 in cash and a 3% royalty on the purchaser's first $10,200,000 of sales each year related to the product in which the patent is incorporated.Larry had not reduced the patent to practice.He had a $56,000 basis for the patent.During 2012, he received $10,000 in royalties.What is the nature and amount of Larry's gain?

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Definitions:

Net Present Value

A financial metric that calculates the present value of all cash flows (both incoming and outgoing) expected from an investment, adjusted for time and interest.

After-Tax Net

The amount of money left after all applicable taxes have been deducted from gross income or profit.

Cash Inflow

The total amount of money being transferred into a business, project, or financial product during a specific period, often resulting from sales, financing, or investments.

Incremental Sales

The additional revenue generated from a particular marketing or sales activity, beyond the ordinary sales figures.