Question

1. For each of the following items, indicate whether the costs should be capitalized or expensed immediately. [4 points]

1. Purchased a customer list from another company for $100,000.
2. Spent $200,000 to develop a new product.
3. Purchased a license agreement for $500,000.
4. Spent $500,000 on wages for scientists who worked on a project for which patent is likely to be filed.

Answer 1

a. Should be capitalized

Explanation

Customer lists are recognised as intangible assets in accordance with IAS 38. This accounting standard sets out the rules for recognising intangible assets, whether purchased or self-created, at cost if:

(a) it is probable that the expected future economic benefits attributable to the asset will flow to the entity; and

(b) the cost of the asset can be measured reliably.

The probability of expected future economic benefits must be based on reasonable and supportable assumptions about conditions that will exist over the life of the asset. The probability criterion is always considered to be met for intangible assets that are acquired separately, or in a business combination.

b.Should be treated as an expense in the period in which it incurred

Explanation

Developing a new product for your small business requires you to spend money on research, design and other related costs. Under generally accepted accounting principles, or GAAP, a business must record these costs as expenses on its income statement in the period in which it incurs them instead of capitalizing them on its balance sheet.

c.Should be Capitalized

Explanation

A license gives the holder certain rights to generate income from someone else's creative work or invention. The license protects the holder's proprietary rights. so it is treated as an expense and amortized over the period of the license

d.Should be expense off

Capitalization is allowed only for costs incurred to defend or register a patent, trademark, or similar intellectual property successfully. Also, companies can capitalize on the costs that they incur to purchase trademarks, patents, and copyrights.