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Q5IFRS

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Intermediate Accounting (Kieso)
Found in: Page 656

Short Answer

Question: Indicate whether the following items are capitalized or expensed in the current year.

  1. Purchase cost of a patent from a competitor.
  2. Research costs.
  3. Development costs (after achieving economic viability).
  4. Organizational costs.
  5. Costs incurred internally to create goodwill.

Answer

Items (a) and (c) should be capitalized, and the rest of the items should be expensed in the current year.

See the step by step solution

Step by Step Solution

Step 1: Meaning of Capitalization 

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.

Step 2: Indication the items that are capitalized or expensed in the current year 

S.no.

Items

Indication

Explanation

a

The purchase cost of a patent from a competitor.

Capitalized

Generally, the cost of patents is indicated as an expense, but successful legal proceedings should be capitalized.

b

Research costs

Expensed

If there are no future advantages, research should be expensed.

c

Development cost (after achieving economic viability)

Capitalized

The cost of developing an asset for sale or use is capitalized only if it proves to be technically and economically viable.

d

Organizational costs

Expensed

Organizational expenditures should be expensed since it is difficult to predict future benefits and their relation to future revenues.

e

Costs incurred internally to create goodwill

Expensed

Expenses for establishing goodwill are included in the cost of preparing intangible assets for their intended use.

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