Question
McNabb company spent $190,000 developing a new process $45,000 in legal fees to obtain a patent and $91,000 to market the process that was patented, all in the year 2014.
How should these costs be accounted for in 2014?
Show journal entries
How should these costs be accounted for in 2014?
Show journal entries
Answers
GPT-4o mini
In accounting, costs related to the development of a new process, legal fees for obtaining a patent, and marketing expenses are treated differently. Below is how McNabb company should account for these costs in 2014, along with the corresponding journal entries for each category:
1. **Research and Development Costs**: The $190,000 spent on developing the new process is typically treated as an expense in the year incurred, as per accounting standards (like GAAP and IFRS) which usually do not allow capitalization of R&D costs. Therefore, this would be recorded as an expense.
2. **Legal Fees for Patent Application**: The $45,000 in legal fees incurred for obtaining the patent can be capitalized as an intangible asset because it pertains directly to the acquisition of a patent. This expense is not expensed immediately but rather amortized over the life of the patent.
3. **Marketing Costs**: The $91,000 spent on marketing the process is also treated as an expense in the year incurred. Marketing costs do not create long-term assets and are typically expensed as incurred.
Here are the journal entries for each of these costs:
### Journal Entries for 2014
1. **R&D Expense**
```
Date Account Debit Credit
2014-xx-xx Research & Development $190,000
Cash/Accounts Payable $190,000
(To record research and development costs incurred)
```
2. **Legal Fees for Patent**
```
Date Account Debit Credit
2014-xx-xx Patent $45,000
Cash/Accounts Payable $45,000
(To record legal fees incurred for patent application)
```
3. **Marketing Expense**
```
Date Account Debit Credit
2014-xx-xx Marketing Expense $91,000
Cash/Accounts Payable $91,000
(To record marketing expenses incurred)
```
### Summary of Entries
- The **Research & Development expense** is recorded as an expense immediately.
- The **Patent** costs are capitalized as an intangible asset.
- The **Marketing expense** is also recognized immediately as an expense.
These journal entries ensure that the financial statements for 2014 accurately reflect the company's expenditures, adhering to relevant accounting standards.
1. **Research and Development Costs**: The $190,000 spent on developing the new process is typically treated as an expense in the year incurred, as per accounting standards (like GAAP and IFRS) which usually do not allow capitalization of R&D costs. Therefore, this would be recorded as an expense.
2. **Legal Fees for Patent Application**: The $45,000 in legal fees incurred for obtaining the patent can be capitalized as an intangible asset because it pertains directly to the acquisition of a patent. This expense is not expensed immediately but rather amortized over the life of the patent.
3. **Marketing Costs**: The $91,000 spent on marketing the process is also treated as an expense in the year incurred. Marketing costs do not create long-term assets and are typically expensed as incurred.
Here are the journal entries for each of these costs:
### Journal Entries for 2014
1. **R&D Expense**
```
Date Account Debit Credit
2014-xx-xx Research & Development $190,000
Cash/Accounts Payable $190,000
(To record research and development costs incurred)
```
2. **Legal Fees for Patent**
```
Date Account Debit Credit
2014-xx-xx Patent $45,000
Cash/Accounts Payable $45,000
(To record legal fees incurred for patent application)
```
3. **Marketing Expense**
```
Date Account Debit Credit
2014-xx-xx Marketing Expense $91,000
Cash/Accounts Payable $91,000
(To record marketing expenses incurred)
```
### Summary of Entries
- The **Research & Development expense** is recorded as an expense immediately.
- The **Patent** costs are capitalized as an intangible asset.
- The **Marketing expense** is also recognized immediately as an expense.
These journal entries ensure that the financial statements for 2014 accurately reflect the company's expenditures, adhering to relevant accounting standards.