Orange Company developed a patent internally for its own benefit. It incurred research and development costs totaling $12 million, and legal and filing fees costs paid to a law firm to secure the patent, totaling $2 million. What amount can Orange capitalize as the cost of the patent

Orange Company

The amount which Orange Company can capitalize as the cost of the patent is $2 million.

Explanation:

a) Data and Calculations:

Research and development costs of patent = $12 million

Legal fees for securing the patent = $2 million

Total cost of patent = $14 million ($12 million + $2 million)

Allowable capitalization cost = $2 million

b) Capitalization cost of patent:

Only the legal fees that are incurred to register or defend an internally developed patent are allowed for capitalization.  The research and development costs of an internally developed patent cannot be capitalized, but they are expensed as incurred.  However, Orange Company can capitalize the cost of acquired patent and its legal fees.

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