Final answer:
The $20,000 consulting fee may be capitalized if the customization enhances the software's functionality or efficiency, reflecting an investment in future revenue generation that aligns with general accounting principles.
Step-by-step explanation:
Can the $20,000 Paid to the Consultant be Capitalized?
When a company pays for software and customization services, accounting principles determine how these costs are recognized. The $90,000 paid for the software license is typically considered a capital expenditure since it is for a multi-year license. Capitalizing such costs spreads the expense over the useful life of the software.
Regarding the $20,000 consulting fee, if the services provided by the consultant add value to the software, making it more efficient or functional, generally accepted accounting principles (GAAP) allow for this cost to also be capitalized. The rationale is that the customization is not a regular business expense but an investment that enhances the software's value and contributes to future revenue generation.
Therefore, capitalizing the $20,000 fee makes sense if the customization is not for maintenance or minor changes, but for significant improvements that increase the software's useful life and functionality. This capitalization aligns with the concept of matching expenses with the revenues they generate.