Chapter 10, Problem 10.26E

Research and development

• LO10–8

In 2018, 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 2018 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.