Under the full-cost approach to oil and gas accounting:
1. costs related to successful efforts are expensed and others capitalized
2. cost related to successful efforts are capitalized and others expensed
3. all costs are expensed as incurred
4. all costs are capitalized as incurred
5. only the cost of buildings and equipment are capitalized
Under the full-cost approach to oil and gas accounting:
| 1. | costs related to successful efforts are expensed and others capitalized | |
| 2. | cost related to successful efforts are capitalized and others expensed | |
| 3. | all costs are expensed as incurred | |
| 4. | all costs are capitalized as incurred | |
| 5. | only the cost of buildings and equipment are capitalized |
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In 2018, Space Technology Company modified its model Z2 satellite to incorporate a new communication device. The company made the following expenditures:
| Basic research to develop the technology | $ | 2,350,000 | |
| Engineering design work | 750,000 | ||
| Development of a prototype device | 370,000 | ||
| Acquisition of equipment | 67,000 | ||
| Testing and modification of the prototype | 270,000 | ||
| Legal and other fees for patent application on the new communication system | 47,000 | ||
| Legal fees for successful defense of the new patent | 27,000 | ||
| Total | $ | 3,881,000 | |
The equipment will be used on this and other research projects. Depreciation on the equipment for 2018 is $17,000.
During your year-end review of the accounts related to intangibles, you discover that the company has capitalized all of the above as costs of the patent. Management contends that the device simply represents an improvement of the existing communication system of the satellite and, therefore, should be capitalized.
Required:
Prepare correcting entries that reflect the appropriate treatment of the expenditures. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
1- Record the correcting entry to expense R&D costs incorrectly capitalized.
2- Record the correcting entry to capitalize the cost of equipment incorrectly capitalized as a patent.
3- Record the correcting entry to record depreciation on equipment used in R&D projects.
Interest During Construction
Matrix Inc. borrowed $1,000,000 at 8% to finance theconstruction of a new building for its own use. Construction beganon January 1, 2016, and was completed on October 31, 2016.Expenditures related to this building were:
| January 1 | $252,000 | (includes cost of purchasing land of $150,000) |
| May 1 | 310,000 | |
| July 1 | 420,000 | |
| October 31 | 276,000 |
In addition, Matrix had additional debt (unrelated to theconstruction) of $500,000 at 9% and $800,000 at 10%. All debt wasoutstanding for the entire year.
Required:
1. Compute the amount of interest capitalized related to theconstruction of the building.
2. If the expenditures are assumed to have been incurred evenlythroughout the year:
a. Compute weighted average accumulated expenditures.
b. Compute the amount of interest capitalized on the building.
