Reference no: EM132951774

HSO Corp. designs, manufactures and sells golf carts, scooters and similar vehicles. When a prospective client contacts one of their seven corporate offices, the office manager fills out an "intake questionnaire" to determine if HSO can meet the prospective client's needs. The office manager assembles a team of employees with expertise in design, production, marketing and accounting; the team reviews the intake questionnaire and determines if HSO can take on the order. If so, the office manager prepares a three-page written proposal for the prospective client; the proposal explains the responsibilities of both HSO and the client, along with a timeline and a budget. The proposal is forwarded to the prospective client electronically, and the client has ten calendar days to accept it. If HSO cannot take on the order, the prospective client receives an automatically generated form letter; if the prospective client does not accept the proposal within ten calendar days, they receive a different form letter. The new client remits half of the fee at the time the proposal is accepted, and HSO prepares weekly progress reports as the project moves forward. The reports are filed in HSO's database; a hard copy is sent to the client. On a monthly basis, HSO's office manager prepares a comprehensive status report for all current engagements. One week before each project is concluded, HSO bills the client for half of the remaining amount due; after the client has paid all outstanding invoices, HSO completes the work and bills the client for all remaining amounts. HSO delivers the finished product; the client must pay the full amount due within 30 days of the final invoice date. If the client pays within 15 days, HSO gives a 3% discount off the amount due.

Problem 1: On April 1 of the current year, EPL Corporation accepted a three-page written proposal from HSO to design and build 10 customized golf carts for EPL's internal use. The total price for the order was $3400. How will EPL account for the design cost in its accounting information system?

Group of answer choices

Option 1: It will be expensed in the period incurred.

Option 2: It will be expensed when cash is paid.

Option 3: It will be capitalized to inventory.

Option 4: It will be capitalized to some other asset