Question

Eames Company enters into a contract with Leather Corporation to install a new general ledger system and provide IT services for the ledger system for five years. Eames Company incurs commission costs of $25,000 to obtain the contract. Design costs of $40,000 are incurred to modify the system according to Leather's specific requests. $10,000 is spent on printed materials, which includes $5,000 for the original printing of ledger handbooks and $5,000 for a reprint of ledger handbooks due to errors in the first printing.

The incremental cost of obtaining the contract with Leather Corporation that will be recognized as an asset is:

A. $65,000
B. $25,000
C. $70,000
D. $75,000

Answer 1

The correct answer to the question is option B,$25000.

Step-by-step explanation:

This $25000 commission costs would not have been incurred if the contract was not negotiated and agreed upon .As a result the commission costs qualify to be recognized as asset and then amortized to income statement over the contract life so as to match it against yearly revenue from the contract.

The design costs and costs of printing are merely costs of sales for the contract that could be expensed in the first year of the contract.