Satellite Systems modified its model Z$2$ satellite to incorporate a new communication device. The company made the following expenditures:

Basic research to develop the technology

Engineering design work

Development of a prototype device

Testing and modification of the prototype

Legal fees for patent application

Legal fees for successful defense of the new patent

Total

$ $4,900,000$

$1,360,000$

$690,000$

$490,000$

$89,000$

$49,000$

$ $7,578,000$

During your year$-$end review of the accounts related to intangibles, you discover that the company has capitalized all costs of the patent. Management contends that the device represents an improvement of the existing communication system of the satellite and, therefore, should be capitalized