In 2012, 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 ..............................$4,000,000
Engineering design work ...................................................1,360,000
Development of a prototype device .........................................600,000
Testing and modification of the prototype .................................400,000
Legal fees for patent application .............................................80,000
Legal fees for successful defense of the new patent ......................40,000
Total ........................................................................$6,480,000
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.
Required:
1. Which of the above costs should Satellite Systems capitalize to the Patent account in the balance sheet?
2. Which of the above costs should Satellite Systems report as research and development expense in the income statement?
3. What are the basic criteria for determining whether to capitalize or expense intangible related costs?