Milano Gallery purchases the copyright on a painting for $418,000 on January 1. The copyright is good for 10 more years. The company plans to sell prints for 11 years. Prepare entries to record the purchase of the copyright on January 1 and its annual amortization on December 31.

1 January - Copyright (Dr.)                     $418,000

                                  Cash (Cr.)                                   $418,000

31 December - Amortization expense (Dr.)          $41,800

                                      Accumulated amortization (Cr.)             $41,800

where

Dr. = Debit

Cr. = Credit

Explanation:

Copyright is an intangible asset (assets with no physical substance). IAS-38 which deals with intangible assets states that the intangible asset, copyright, recognized on the face of balance sheet should be amortized over its useful life under straight-line method. Amortization should be simply treated as depreciation. It is the systematic allocation of cost to profit or loss statement. The only method that is used to calculate amortization is straight-line method and the formula to it is:

Amortization expense p.a. = Cost / Useful life

⇒ Amortization expense p.a. = 418,000 / 10 = $41,800.

1. Entries to record the purchase of the copyright on January 1

Debit: Intangible asset - copyright with $418,000

Credit: Cash with $418,000

2. Entries to record the copyright annual amortization on December 31

(a) Debit: Amortization expenses with $41,800

Credit: Accumulated amortization expenses with 41,800

(b) Debit: Profit and loss account with $41,800

Credit: Amortization expenses with $41,800

Explanation:

1. Entries to record the purchase of the copyright on January 1

                                                                     DR ($)                   CR ($)

Intangible asset - copyright                       418,000

Cash                                                                                          418,000

Being the purchase of an intangible asset - copyright

2. Entries to record the copyright annual amortization on December 31

                                                                    DR ($)                    CR ($)

Amortization expenses                               41,800

Accumulated amortization expenses                                     41,800

Being the copyright amortization expenses for the year.

Profit and loss account                                  41,800

Amortization expenses                                                            41,800

Being the copyright annual amortization written off for the year

Note:

The annual amortization expenses is calculated as follows:

Annual amortization = copyright cost ÷ number of its useful life = $418,000 ÷ 10 = $41,800