Question

In 2013, 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 2013 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.
1. Record the correcting entry to expense R&D costs incorrectly capitalized
2. Record the correcting entry to capitalize the cost of equipment incorrectly capitalized as a patent.
3. Record the correcting entry to record depreciation on equipment used in R&D projects.

Answer 1

1. Dec 31

Dr Research and Development Expense $3,180,000

Cr 2013 Patent $3,180,000

2. Dec 31

Dr Equipment $60,000

Cr 2013 Patent $60,000

3. Dec 31

Dr Research and Development Expense $10,000

Cr 2013 Accumulated Depreciation - Equipment $10,000

Step-by-step explanation:

1. Preparation of the Journal entry to Record the correcting entry to expense R&D costs incorrectly capitalized

Dec 31

Dr Research and Development Expense $3,180,000

Cr 2013 Patent $3,180,000

(To record research and development expense )

Calculation for the Total of research and development expense

Basic research to develop the technology $2,000,000

Engineering design work $680,000

Development of a prototype device $300,000

Testing and modification of the prototype $200,000

Total research and development expense $3,180,000

2. Preparation of the journal entry to Record the correcting entry to capitalize the cost of equipment incorrectly capitalized as a patent.

Dec 31

Dr Equipment $60,000

Cr 2013 Patent $60,000

(To correct cost of equipment capitalized to patent)

3. Preparation of the Journal entry to Record the correcting entry to record depreciation on equipment used in R&D projects.

Dec 31

Dr Research and Development Expense $10,000

Cr 2013 Accumulated Depreciation - Equipment $10,000

(To record research and development expense)