Question: Indicate whether the following items are capitalized or expensed in the current year.
Items (a) and (c) should be capitalized, and the rest of the items should be expensed in the current year.
When an item is recorded as an asset instead of an expense, that thing is capitalized. Companies set up a capitalization constraint below which uses are judged as well inconsequential to capitalize and keep in accounting records for a long time.
The purchase cost of a patent from a competitor.
Generally, the cost of patents is indicated as an expense, but successful legal proceedings should be capitalized.
If there are no future advantages, research should be expensed.
Development cost (after achieving economic viability)
The cost of developing an asset for sale or use is capitalized only if it proves to be technically and economically viable.
Organizational expenditures should be expensed since it is difficult to predict future benefits and their relation to future revenues.
Costs incurred internally to create goodwill
Expenses for establishing goodwill are included in the cost of preparing intangible assets for their intended use.
Question: (Accounting for Research and Development Costs) Czeslaw Corporation’s research and development department has an idea for a project it believes will culminate in a new product that would be very profitable for the company. Because the project will be very expensive, the department requests approval from the company’s controller, Jeff Reid.
Reid recognizes that corporate profits have been down lately and is hesitant to approve a project that will incur significant expenses that cannot be capitalized due to the requirements of the authoritative literature. He knows that if they hire an outside firm that does the work and obtains a patent for the process, Czeslaw Corporation can purchase the patent from the outside firm and record the expenditure as an asset. Reid knows that the company’s own R&D department is first-rate, and he is confident they can do the work well.
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