Exercise 10-26 Research and development [LO10-8]

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 the 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. (If no entry is required for a transaction, select "No journal entry required" in the first account field.)

1. Record the correcting entry to expense R&D costs incorrectly capitalized

2. Record the correcting entry to capitalize the cost of equipment incorrectly capitalized as a patent.

3. Record the correcting entry to record depreciation on equipment used in R&D projects.