Which of the following costs should be capitalized under U.S. GAAP?

Answer options:

Costs to modify a product for a specific customer request.

Design and testing of a prototype before commercial production.

Legal fees to successfully defend a patent.

Materials and labor for a machine built for use in R&D activities that has alternative future uses.

How to approach this question

R&D Rule: Expense all R&D unless it is (1) Software after feasibility, (2) Tangible asset with alternative future use.

Full Answer

D.Materials and labor for a machine built for use in R&D activities that has alternative future uses.✓ Correct

Tangible assets acquired or constructed for R&D activities that have alternative future uses (in other R&D projects or otherwise) are capitalized and depreciated.

Common mistakes

Expensing all R&D related items without checking for alternative use.

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