Question: (Accounting for R&D Costs) Price Company from time to time embarks on a research program when a special project seems to offer possibilities. In 2016, the company expends \(325,000 on a research project, but by the end of 2016 it is impossible to determine whether any benefit will be derived from it.

Instructions

1. What account should be charged for the \)325,000, and how should it be shown in the financial statements?
2. The project is completed in 2017, and a successful patent is obtained. The R&D costs to complete the project are \(110,000. The administrative and legal expenses incurred in obtaining patent number 472-1001-84 in 2017 total \)16,000. The patent has an expected useful life of 5 years. Record these costs in journal entry form. Also, record patent amortization (full year) in 2017.
3. In 2018, the company successfully defends the patent in extended litigation at a cost of \(47,200, thereby extending the patent life to December 31, 2025. What is the proper way to account for this cost? Also, record patent amortization (full year) in 2018.
4. Additional engineering and consulting costs incurred in 2018 required to advance the design of a product to the manufacturing stage total \)60,000. These costs enhance the design of the product considerably. Discuss the proper accounting treatment for this cost.

Step by step solution

01

Meaning of Intangible Asset

Intangible assets are identified as non-monetary assets that have no physical existence, according to the International Financial Reporting Standards (IFRS). Intangible assets, like other assets, are intended to create future financial returns for the organization.

02

Explaining the amount that should be charged for the $325,000 and its reporting in financial statements

According to GAAP, the $325,000 is a research and development expenditure that should be charged to the R&D Expense, and the overall cost of R&D should be separately declared in the notes to the financial statements if not separately stated in the income statement.

03

 Step 3: Preparing journal entries (b)

Date	Particular	Debit ($)	Credit ($)
	Research and Development Expense	110,000
	Cash, Accts. Payable, etc.		110,000
	(To record research and development costs)
	Patents	16,000
	Cash, Accts. Payable, etc.		16,000
	(To record legal and administrative costs incurred to obtain a patent)
	Amortization Expense	3,200
	Patents		3,200
	(To record one year’s amortization expense)

Working Notes:

Calculating the amount of amortization expense

$$\begin{gathered} \text{Amortization}\text{expense}=\frac{\text{Patent}\text{cost}}{\text{Useful}\text{life}} \\ =\frac{\$16,000}{5} \\ =\$3,200 \end{gathered}$$

04

Preparing journal entries (c)

Date	Particular	Debit ($)	Credit ($)
	Patents	47,200
	Cash, Accts. Payable, etc.		47,200
	(To record legal cost of successfully defending patent)

Since the defense was successful and the patent's useful life was prolonged, the expense of defending the patent is capitalized.

Date	Particular	Debit ($)	Credit ($)
	Amortization Expense	7,500
	Patents		7,500
	(To record one year’s amortization Expense)

$$\begin{gathered} WorkingNotes: \\ Calculationofone-yearamortizationexpense \\ \text{Initial}\text{Amortization}\text{expense}=\frac{\text{Patents}-\text{Amortization}\text{expense}}{\text{Useful}\text{life}} \\ =\frac{\$16,000-\$3,200}{8} \\ =\frac{\$12,000}{8} \\ =\$1,600 \\ \text{Total}\text{amortization}\text{expense}=\text{Initial}\text{amortization}+\text{Ending}\text{amortization} \\ =\$1,600+\$5,900 \\ =\$7,500 \end{gathered}$$

05

Explaining the proper accounting treatment for the cost (d)

R & D costs are the additional engineering and consulting expenditures necessary to progress a product's concept to the production stage. It is R&D since it turns information into a strategy or design for a new product, as stated in the chapter.

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