West Company made the following expenditures relating to Product Y:
Legal costs to file a patent on Product Y. Production of the finished product would not have been undertaken without the patent: 100,000
Special equipment used solely for development of Product Y. The equipment has no other use and has an estimated useful life of four years: 600,000
Labor and material costs incurred in producing a prototype: 2,000,000
Cost of testing the prototype: 800,000
What amount should be expensed when incurred?
A. 2,800,000
B. 2,950,000
C. 3,400,000
D. 3,500,000
Answer (2)
When determining the amounts to be expensed immediately for expenditures related to the development of a new product, certain costs are considered capitalizable and certain costs must be expensed as incurred based on accounting principles.
Let's go through the costs item by item:
Legal costs to file a patent:
These costs, amounting to $100,000, are capitalizable. The patent is considered an intangible asset that provides future economic benefit. Therefore, this cost is not expensed when incurred.
Special equipment used solely for development:
The cost of the equipment, which is $600,000, can be capitalized because it is used to produce the product. As the equipment has no other use and a useful life of four years, it is treated as a capital expenditure (potentially depreciated over its useful life) rather than immediately expensed.
Labor and material costs incurred in producing a prototype:
These costs, totaling $2,000,000, are usually expensed as incurred, especially if they are related to the research phase and the production of a prototype. Accounting standards often require R&D costs to be expensed.
Cost of testing the prototype:
Testing costs are also considered part of R&D, and therefore, the $800,000 is typically expensed when incurred.
Adding up the costs that should be expensed now gives us:
2 , 000 , 000 (labor and materials for prototype) + 800 , 000 (testing) = 2 , 800 , 000
Therefore, the total amount to be expensed when incurred is $2,800,000.
The correct choice here is a. 2,800,000.
The total amount to be expensed when incurred for Product Y is $2,800,000. This includes labor and material costs for the prototype and testing costs. The correct answer is A. 2,800,000.
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