Question

In 2021, 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 2021 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. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) Record the correcting entry for the patent.

Answer 1

Answer:

For Equipment

Debit  -  Equipment - $60,000

Credit -  Patent ------- $60,000

For Depreciation

Debit -  Research and development expenses ---- $10,000

Credit - Accumulated depreciated for equipment --- $10,000

For Research and Development Expenses

Debit - Research and development expenses - $3,180,000

Credit - Patent ---------------------------------------------- $3,180,000

Explanation:

For Equipment

The equipment cost was wrongfully capitalized as patent reason is that the equipment will also be used for other research projects.

For Depreciation

The depreciation shown above is the actual depreciation expense on the equipment.

For Research and Development Expenses

The breakdown of total expenses involved in research and development are as follow -

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

Engineering design work --------------------------$680,000

Development of a prototype ---------------------$300,000

Testing and modification --------------------------$200,000

Total cost -----------------------------------------------$3,180,000