Satellite Systems modified its model Z2 satellite to
incorporate a new communication device. The company made the following
expenditures:
Basic research to
develop the technology $3,900,000
Engineering design
work 1,180,000
Development of a
prototype device 590,000
Testing and
modification of the prototype 390,000
Legal fees for
patent application 79,000
Legal fees for
successful defense of the new patent 39,000
Total $6,178,000
During your year-end review of the accounts related to intangibles, you discover that the company has capitalized all the above as 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.
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