Question

Satellite Systems modified its model Z2 satellite to incorporate a new communication device. The company made the following expenditures: Basic research to develop the technology $3,900,000 Engineering design work 1,180,000 Development of a prototype device 590,000 Testing and modification of the prototype 390,000 Legal fees for patent application 79,000 Legal fees for successful defense of the new patent 39,000 Total $6,178,000During your year-end review of the accounts related to intangibles, you discover that the company has capitalized all the above as costs of the patent. Management contends that the device represents an improvement of the existing communication system of the satellite and, therefore, should be capitalized.4.value:1.92 pointsRequired informationRequired:1. Determine the amount Satellite Systems should capitalize to the Patent account in the balance sheet.HintsReferenceseBook & ResourcesHint #1Check my work5.value:1.92 pointsRequired information2. Determine the amount Satellite Systems should report as research and development expense in the income statement.HintsReferenceseBook & ResourcesHint #1

Answer 1

Answer:

1 - Amount to be capitalized as patent is $118,000

2 - Amount to be reported as research and development expense is $6,060,000

Explanation:

1. - Amount to be capitalized as patent is $118,000

Legal fees for patent application -------------------------$79,000

Legal fees for successful defense of new patent -- $39,000

Total ---------------------------------------------------------------- $118,000

2. - Amount to be reported as research and development expense is $6,060,000

Basic research to develop the technology ---- $3,900,000

Engineering design work ---------------------------- $1,180,000

Development of a prototype ----------------------- $590,000

Testing and modification of the prototype ---- $390,000

Total -------------------------------------------------------- $6,060,000