Lee Was the Holder of a Patent on a Wireless

question 122

Essay

Lee was the holder of a patent on a wireless modem.During 2011,he sold all substantial rights in the patent for $365,000 in cash and a 2% royalty on the purchaser's first $10,600,000 of sales each year related to the product in which the patent is incorporated.Lee had not reduced the patent to practice.He had a $56,000 basis for the patent.During 2011,he received $10,000 in royalties.What is the nature and amount of Lee's gain?

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Definitions:

Product Costs

Costs that are directly associated with the production of goods or services, including direct materials, direct labor, and manufacturing overhead.

Period Costs

Expenses that are not directly tied to the production of goods and are therefore expensed in the period they occur, such as selling and administrative expenses.

Variable Cost

Costs that vary directly with the level of production or service delivery.

Fixed Manufacturing Cost

A rephrased definition for Fixed Manufacturing Overhead; these are costs that do not change with the level of manufacturing activity, such as property taxes on a factory.