E 1026: Research and development

LO108

In 2013, 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 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 2013 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.