Which of the following statements correctly describes the accounting treatment of prototype costs incurred by the company? 1. Capitalize $1,100,000 and amortize it over the expected sales life of the new product 2. Capitalize $1,100,000 and amortize it over the life of the prototype. 3. Capitalize $1,000,000 and amortize it over the life of the prototype and expense $100,000 as incurred. 4. Expense $1,100,000 as incurred.

Which of the following statements correctly describes the accounting treatment of prototype costs incurred by the company? 1. Capitalize $1,100,000 and amortize it over the expected sales life of the new product 2. Capitalize $1,100,000 and amortize it over the life of the prototype. 3. Capitalize $1,000,000 and amortize it over the life of the prototype and expense $100,000 as incurred. 4. Expense $1,100,000 as incurred.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

A company's research department incurred $1,000,000 in material, labor, and overhead
costs to construct a prototype of a new product and $100,000 to test and modify the
prototype.
Which of the following statements correctly describes the accounting treatment of
prototype costs incurred by the company?
1. Capitalize $1,100,000 and amortize it over the expected sales life of the new product
2. Capitalize $1,100,000 and amortize it over the life of the prototype.
3. Capitalize $1,000,000 and amortize it over the life of the prototype and expense
$100,000 as incurred.
4. Expense $1,100,000 as incurred.

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