E$7-6$ Satellite Systems modified its model Z$2$ satellite to incorporate a new communication

device. The company made the following expenditures:

Basic research to develop the technology

Engineering design work

Development of a prototype device

Testing and modification of the prototype

Legal fees for patent application

Legal fees for successful defense of the new patent

Total

$[$$$3,900,000],[1,180,000],[590,000],[390,000],[79,000],[39,000],[$$$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.

Required:

Which of the above costs should Satellite Systems capitalize to the Patent account in the

balance sheet?

Which of the above costs should Satellite Systems report as Research and Development

Expense in the income staiement?

What are the basic criteria for determining whether to capitalize or expense intangible

related costs?