CPA Exam - FAR (Financial Accounting and Reporting)Financial ReportingMedium
A publicly traded company, Innovate Corp., developed a new patented pharmaceutical drug. The company incurred the following costs related to the drug prior to its release: $2,000,000 for research activities, $1,500,000 for development activities after technological feasibility was established, $500,000 for legal fees to obtain the patent, and $250,000 for successful defense of the patent against an infringement lawsuit. What is the total amount that Innovate Corp. should capitalize as an intangible asset related to this patent?
- A$4,250,000
- B$2,000,000
- C$4,500,000
- D$2,250,000
Show answer & explanationAnswer & explanation
Correct answer: D. $2,250,000
Costs incurred for research and development activities are generally expensed as incurred. However, legal fees to obtain a patent and successful defense costs are capitalized as part of the patent's cost, as they provide future economic benefits.
Why the other options are wrong
- A. This incorrectly includes research and development costs that are generally expensed.
- B. This only includes research costs which are expensed, not capitalized.
- C. This incorrectly includes all research and development costs, which are typically expensed.
Intangible Asset Capitalization
Costs incurred to acquire or create intangible assets are capitalized if they provide future economic benefits and meet specific criteria, while R&D costs are generally expensed.
- Legal fees to obtain a patent are capitalized.
- Costs to successfully defend a patent are capitalized.
- Research and development costs are generally expensed as incurred.
Memory trick: INTangible assets have a CAPitalized value, but R&D is an EXPENSE.