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 $6,178,000
During 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 points
Required information
Required:
1. Determine the amount Satellite Systems should capitalize to the Patent account in the balance sheet.
5. value:
1.92 points
Required information
2. Determine the amount Satellite Systems should report as research and development expense in the income statement.

Answer 1

Answer: See explanation

Explanation:

a. Determine the amount Satellite Systems should capitalize to the Patent account in the balance sheet.

This would be:

Legal fees for application of patent = $79,000

Add: Legal fees for successful defense of new patent = $39000

Total cost = $79000 + $39000 = $118,00

b. Determine the amount Satellite Systems should report as research and development expense in the income statement.

This would be:

Basic research in developing technology = $3,900,000

Add: Engineering design work = $1,180,000

Add: Development of prototype device = $590,000

Add: Testing and modification of prototype = $390,000

Total = $6,060,000