Question

Which of the following costs should be capitalized in the year incurred?

a. Research and development costs.
b. Costs to internally generate goodwill.
c. Organizational costs.
d. Costs to successfully defend a patent.

Answer 1

In general, costs that should be capitalized in the year incurred include costs to internally generate goodwill, organizational costs, and costs to successfully defend a patent.

Step-by-step explanation:

In general, costs that should be capitalized in the year incurred include costs to internally generate goodwill, organizational costs, and costs to successfully defend a patent.

• Costs to internally generate goodwill: When a company internally generates goodwill, which is the reputation and customer base it has developed over time, these costs should be capitalized. Examples of costs that can be capitalized include advertising and marketing expenses.
• Organizational costs: These are the costs incurred to organize a new business entity. Common examples of organizational costs that should be capitalized include legal fees, incorporation fees, and fees for obtaining licenses and permits.
• Costs to successfully defend a patent: If a company has incurred costs to successfully defend a patent and protect its intellectual property rights, these costs should be capitalized.

It's important to note that research and development costs generally should not be capitalized in the year incurred. These costs are expensed as they are incurred because the outcome of R&D projects is uncertain and there is no guarantee of future benefits.