Hopkins Co. often partners with other companies to deliver technology solutions to its clients. Because of these working relationships, Hopkins offers a sales incentive program to these companies for work that is brought to Hopkins. Hopkins agrees to pay a 2% finder’s fee to these companies for a lead that results in a signed contract worth $5,000,000 or more. The fee is payable one month after winning the contract. Wilson Consulting, one of the partner companies, assists Hopkins in winning $7,500,000 in work from Tadich, Inc. The contract is signed on July 1, 20X1, and Hopkins expects to take two years to complete the work. In addition to the finder’s fee, Hopkins incurred legal fees of $10,000 to write the contract prior to signing, and Hopkins staff incurred $15,000 in developing its proposal. Hopkins Co. has a December 31 accounting year.

Required:

1. What amount of costs will be capitalized upon the signing of the contract?

2. How much expense should Hopkins recognize for the above costs in its pre-tax income for the year ended December 31, 20X1?

3. Prepare the journal entries that Hopkins should make related to the contract during 20X1. You may omit reclassifications to current assets.