Summer Company has been working on creating a new tablet to compete with existing tablets. The entity is confident it has the ability to sell the asset and show an income. The entity spent P2,000,000 during the first quarter of the current year studying alternatives. 2,000,000/5 = 400,000 During the second quarter, the entity spent an additional P250,000 improving one alternative at which point it became technologically and economically feasible. During the third quarter, the entity spent another P750,000 on the tablet to make it ready for use and sale by the end of the year. What total amount should be capitalized? a. 3,000,000 b. 1,000,000 c. 750,000 d. 0
Answer (1)
In this question, we are determining the amount that should be capitalized for the development of a new tablet by Summer Company. The key aspect to focus on in this scenario is distinguishing between 'research costs' and 'development costs.' In accounting, research costs are generally expensed, while development costs, once certain criteria are met, can be capitalized.
Here's a step-by-step breakdown:
Research Phase (First Quarter) :
The entity spent P2,000,000 studying alternatives. Research is typically considered an exploration phase without assured future benefits.
As a result, the P2,000,000 spent during the research phase should be expensed and not capitalized.
Development Phase Begins (Second Quarter) :
The entity spends P250,000 upon which the project becomes technologically and economically feasible. At this point, the development phase begins, and capitalization can start.
Therefore, the P250,000 spent after achieving feasibility is eligible for capitalization.
Further Development (Third Quarter) :
P750,000 is spent to make the tablet ready for use and sale. These costs are part of the development phase and also qualify for capitalization.
Adding up the costs that qualify for capitalization:
P 250 , 000 + P 750 , 000 = P 1 , 000 , 000
Thus, the total amount that should be capitalized is P1,000,000.
The correct answer is (b) 1,000,000 .
