ExpertMedium1 markMultiple Choice
CPA · Question 39 · Area III: Select Transactions
A company incurs the following costs to obtain a contract with a customer: <br/>- Sales commission (paid only if contract signed): $5,000<br/>- Legal fees for contract drafting: $2,000<br/>- Travel costs to client meeting: $1,000<br/><br/>What amount should be recognized as an asset (Contract Costs)?
A company incurs the following costs to obtain a contract with a customer: <br/>- Sales commission (paid only if contract signed): $5,000<br/>- Legal fees for contract drafting: $2,000<br/>- Travel costs to client meeting: $1,000<br/><br/>What amount should be recognized as an asset (Contract Costs)?
Answer options:
A.
$5,000
B.
$7,000
C.
$8,000
D.
$0
How to approach this question
Capitalize 'Incremental costs of obtaining a contract' (costs that wouldn't exist if you didn't get the contract, like commissions). Expense costs that would be incurred regardless (legal, travel, marketing).
Full Answer
A.$5,000✓ Correct
Only the sales commission ($5,000) is an incremental cost of obtaining the contract. Legal fees and travel are expensed as incurred.
Common mistakes
Capitalizing all contract-related costs.
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