CPA Exam - FAR (Financial Accounting and Reporting)Financial ReportingMedium
A publicly traded company, Innovate Corp., is developing a new line of electronic gadgets. During the current year, it incurred the following costs related to the new product line: - Costs for market research to determine consumer demand: $75,000 - Costs for design and engineering of prototypes: $150,000 - Costs for testing and refining prototypes: $100,000 - Costs for legal fees to obtain a patent for a key component: $50,000 - Costs for advertising and promotion of the new product: $25,000 What total amount should Innovate Corp. capitalize as an asset for the current year?
- A$300,000
- B$400,000
- C$125,000
- D$50,000
Show answer & explanationAnswer & explanation
Correct answer: D. $50,000
Under U.S. GAAP, most research and development costs are expensed as incurred. However, costs to obtain a patent (such as legal fees) are capitalized as an intangible asset. Advertising and market research costs are also generally expensed.
Why the other options are wrong
- A. This incorrectly includes design, engineering, and testing costs (R&D).
- B. This incorrectly includes all costs except patent legal fees.
- C. This incorrectly includes market research costs.
R&D Cost Accounting
The rules for recognizing research and development expenditures, generally requiring most to be expensed as incurred.
- Most R&D costs are expensed as incurred.
- Costs to obtain patents are capitalized.
- Costs of materials, equipment, and facilities that have alternative future uses are capitalized.
Memory trick: R&D: Expensed Except for Future Use or Patent Proof.