In 2011, Space Technology Company modified its model Z2 satellite to incorporate
ID: 2385980 • Letter: I
Question
In 2011, Space Technology Company modified its model Z2 satellite to incorporate a new communication device. The company made the following expenditures:
Basic research to develop the technology
$2,000,000
Engineering design work
680,000
Development of a prototype device
300,000
Acquisition of equipment
60,000
Testing and modification of the prototype
200,000
Legal and other fees for patent application on the new communication system
40,000
Legal fees for successful defense of the new patent
20,000
Total
$3,300,000
The equipment will be used on this and other research projects. Depreciation on the equipment for 2011 is $10,000.
During your year-end review of the accounts related to intangibles, you discover that the company has capitalized all of the above as costs of the patent. Management contends that the device simply represents an improvement of the existing communication system of the satellite and, therefore, should be capitalized.
Required:
Prepare correcting entries that reflect the appropriate treatment of the expenditures.
Basic research to develop the technology
$2,000,000
Engineering design work
680,000
Development of a prototype device
300,000
Acquisition of equipment
60,000
Testing and modification of the prototype
200,000
Legal and other fees for patent application on the new communication system
40,000
Legal fees for successful defense of the new patent
20,000
Total
$3,300,000
Explanation / Answer
Date Particulars Debit Credit 2011 Basic Research A/C…….DrEngineering design work A/C…….Dr
To cash
(Being expenses recorded)
2000000
680000
2680000
2011 Equipment…….Dr
To Basic research
To Engineering design work
(Being expenses capitalised)
2680000
2000000
680000
2011 Protoype device A/C…….Dr
Testing Protoype device A/C…….Dr
To Cash
(Being expenses paid)
300000
200000
5000000
2011 P&L A/c…..Dr
To Protoype device
To Testing Protoype device
To Cash
(Being recorded in P$L)
500000
300000
200000
2011 Equipment A/c…..Dr
Legal fees A/c…Dr
Legal fees A/c…Dr
To Cash
(Being expenses paid)
60000
40000
20000
120000
2011
Legal fees A/c…Dr
Legal fees A/c…Dr
To Equipment
(Being expenses capitalised)
40000
20000
60000
Date Particulars Debit Credit 2011 Basic Research A/C…….Dr
Engineering design work A/C…….Dr
To cash
(Being expenses recorded)
2000000
680000
2680000
2011 Equipment…….Dr
To Basic research
To Engineering design work
(Being expenses capitalised)
2680000
2000000
680000
2011 Protoype device A/C…….Dr
Testing Protoype device A/C…….Dr
To Cash
(Being expenses paid)
300000
200000
5000000
2011 P&L A/c…..Dr
To Protoype device
To Testing Protoype device
To Cash
(Being recorded in P$L)
500000
300000
200000
2011 Equipment A/c…..Dr
Legal fees A/c…Dr
Legal fees A/c…Dr
To Cash
(Being expenses paid)
60000
40000
20000
120000
2011
Legal fees A/c…Dr
Legal fees A/c…Dr
To Equipment
(Being expenses capitalised)
40000
20000
60000
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