Question

In 2018, 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	$	2,800,000
Engineering design work		840,000
Development of a prototype device		460,000
Acquisition of equipment		76,000
Testing and modification of the prototype		360,000
Legal and other fees for patent application on the new communication system		56,000
Legal fees for successful defense of the new patent		36,000
Total	$	4,628,000

The equipment will be used on this and other research projects. Depreciation on the equipment for 2018 is $26,000.
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.

Create a general Journal for each-

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

Answer 1

Requirement 1: Record the following journal entry for the research and development expenses capitalized as patents

Date	Account Title and Explanation	Debit	Credit
Dec 31	Research and Development Expense	$4,460,000
2018	Patent		$4,460,000
	To record research and development expense

Note: Research and development expenditure is expensed in the period in which incurred according to the conservative approach adopted by the FASB. Research and development expenditure includes all those research and development related costs incurred before the commercial production of products and it is calculated as follows

Particulars	Amount
Basic research to develop the technology	$2,800,000
Engineering design work	$840,000
Development of a prototype device	$460,000
Testing and modification of the prototype	$360,000
Total research and development expense	$4,460,000

Requirement 2: Record the following journal entry for correcting the equipment cost capitalized as patent

Date	Account Title and Explanation	Debit	Credit
Dec 31	Equipment	$76,000
2018	Patent		$76,000
	To correct cost of equipment capitalized to patent

Requirement 3: Record the following journal entry for the depreciation expense related to research and development

Date	Account Title and Explanation	Debit	Credit
Dec 31	Research and Development Expense	$26,000
2018	Accumulated Depreciation - Equipment		$26,000
	To record research and development expense