[Ramana]

For this question, I just don’t get why design costs are not capitalized?

Eames Company enters into a contract with Leather Corporation to install a new general ledger system and provide IT services for the ledger system for five years. Eames Company incurs commission costs of $25,000 to obtain the contract. Design costs of $40,000 are incurred to modify the system according to Leather’s specific requests. $10,000 is spent on printed materials, which includes $5,000 for the original printing of ledger handbooks and $5,000 for a reprint of ledger handbooks due to errors in the first printing.

The incremental cost of obtaining the contract with Leather Corporation that will be recognized as an asset is: (ans 25,000)

[Keycat]

This is an example of lame wording some rare questions may have and for that reason they were sorted out from real exams and appear instead in review courses. The only reason for the design cost not to be capitalized is that it was spent before the contract was signed. It sounds crazy that a company would allow such spending without any guarantee of return, but this is the case.I would not think much about this question and just go to the next.

[Ramana]

Thanks Keycat!

[Ramana]

On second thought, it could be that they are asking for cost to obtain vs. cost to fulfill

[Author]

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