On June 30, 2020, Duts discovered that it had been manufacturing a product illegally since this product happened to be a patented product for which it did not have the necessary rights. Duts immediately shut down its factory and hired a firm of lawyers to act on its behalf in the acquisition of the necessary rights to manufacture this patented product. Legal fees of PhP 50 000 were incurred during July 2020. The legal process was finalized on July 31, 2020, when Bee was then required to pay PhP 800 000 to purchase the rights, including PhP 80 000 in refundable VAT. During the July factory shut-down: averhead costs of PhP 40 000 were incurred; and significant market share was lost with the result that Bee's total sales over August and September was PhP 20 000 but its expenses were PhP 50 000, resulting in a loss of PhP 30 000. To increase market share, Bee spent an extra PhP 25 000 aggressively marketing their product. This marketing campaign was successful, resulting in sales returning to profitable levels in October. The accountant wishes to capitalize the cost of the patent at: Purchase price: 800 000 + Legal fees: 50 000 + Overheads during the forced shut-down in July: 40 000 + Operating loss in Aug & Sept: 30 000 + Extra marketing required: 25 000-945 o00 Required: Briefly explain whether or not each of the costs identified may be capitalized.
On June 30, 2020, Duts discovered that it had been manufacturing a product illegally since this product happened to be a patented product for which it did not have the necessary rights. Duts immediately shut down its factory and hired a firm of lawyers to act on its behalf in the acquisition of the necessary rights to manufacture this patented product. Legal fees of PhP 50 000 were incurred during July 2020. The legal process was finalized on July 31, 2020, when Bee was then required to pay PhP 800 000 to purchase the rights, including PhP 80 000 in refundable VAT. During the July factory shut-down: averhead costs of PhP 40 000 were incurred; and significant market share was lost with the result that Bee's total sales over August and September was PhP 20 000 but its expenses were PhP 50 000, resulting in a loss of PhP 30 000. To increase market share, Bee spent an extra PhP 25 000 aggressively marketing their product. This marketing campaign was successful, resulting in sales returning to profitable levels in October. The accountant wishes to capitalize the cost of the patent at: Purchase price: 800 000 + Legal fees: 50 000 + Overheads during the forced shut-down in July: 40 000 + Operating loss in Aug & Sept: 30 000 + Extra marketing required: 25 000-945 o00 Required: Briefly explain whether or not each of the costs identified may be capitalized.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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Transcribed Image Text:QUESTION 3
On June 30, 2020, Duts discovered that it had been manufacturing a product
illegally since this product happened to be a patented product for which it did
not have the necessary rights., Duts immediately shut down its factory and
hired a firm of lawyers to act on its behalf in the acquisition of the necessary
rights to manufacture this patented product.
Legal fees of PhP 50 000 were incurred during July 2020.
The legal process was finalized on July 31, 2020, when Bee was then required
to pay PhP 800 000 to purchase the rights, including PhP 80 000 in refundable
VAT.
During the July factory shut-down:
averhead costs of PhP 40 000 were incurred; and
significant market share was lost with the result that Bee's total sales over
August and September was PhP 20 000 but its expenses were PhP 50 000,
resulting in a loss of PhP 30 000.
To increase market share, Bee spent an extra PhP 25 000 aggressively
marketing their product. This marketing campaign was successful, resulting
in sales returning to profitable levels in October.
The accountant wishes to capitalize the cost of the patent at:
Purchase price: 800 000 + Legal fees: 5o 000 + Overheads during the forced
shut-down in July: 40 000 + Operating loss in Aug & Sept: 30 000 + Extra
marketing required: 25 000-94s 000
Required: Briefly explain whether or not each of the costs identified may be
capitalized.
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