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Chapter 12: Q19Q. (page 637)
What is the nature of research and development costs?
The costs of conducting a deliberate search for new information and turning that knowledge into new goods or processes are known as research and development costs.
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Use the information provided in BE12-1. Assume that at January 1, 2019, the carrying amount of the patent on Taylor Swift’s books is \(43,200. In January, Taylor Swift spends \)24,000 successfully defending a patent suit. Taylor Swift still feels the patent will be useful until the end of 2026. Prepare the journal entries to record the $24,000 expenditure and 2019 amortization.
Romo Company spent \(190,000 developing a new process, \)45,000 in legal fees to obtain a patent, and $91,000 to market the process that was patented, all in the year 2017. How should these costs be accounted for in 2017?
Question: (Recording and Amortization of Intangibles) Marshall Company, organized in 2016, has set up a single account for all intangible assets. The following summary discloses the debit entries that have been recorded during 2017.
1/2/17 | Purchased patent (8-year life) | \( 350,000 |
4/1/17 | Purchase goodwill (indefinite life) | 360,000 |
7/1/17 | Purchased franchise with 10-year life; expiration date 7/1/27 | 450,000 |
8/1/17 | Payment of copyright (5-year life) | 156,000 |
9/1/17 | Research and development costs | 215,000 |
\)1,531,000 |
Instructions
Prepare the necessary entries to clear the Intangible Assets account and to set up separate accounts for distinct types of intangibles. Make the entries as of December 31, 2017, recording any necessary amortization and reflecting all balances accurately as of that date. (Use straight-line amortization.)
Question: Briefly discuss the convergence efforts that are underway in the area of intangible assets.
(Accounting for R&D Costs) In 2015, Wright Tool Company purchased a building site for its proposed research and development laboratory at a cost of \(60,000. Construction of the building was started in 2015. The building was completed on December 31, 2016, at a cost of \)320,000 and was placed in service on January 2, 2017. The estimated useful life of the building for depreciation purposes was 20 years. The straight-line method of depreciation was to be employed, and there was no estimated residual value.
Management estimates that about 50% of the projects of the research and development group will result in long-term benefits (i.e., at least 10 years) to the corporation. The remaining projects either benefit the current period or are abandoned before completion. A summary of the number of projects and the direct costs incurred in conjunction with the research and development activities for 2017 appears below.
Number of Projects | Salaries and Employee Benefits | Other Expenses (excluding Building Depreciation Charges) | |
Completed projects with long-term benefits | 15 | \( 90,000 | \)50,000 |
Abandoned projects or projects that benefit the current period | 10 | 65,000 | 15,000 |
Projects in process—results indeterminate | 5 | 40,000 | 12,000 |
Total | 30 | \(195,000 | \)77,000 |
Upon recommendation of the research and development group, Wright Tool Company acquired a patent for manufacturing rights at a cost of $88,000. The patent was acquired on April 1, 2016, and has an economic life of 10 years.
Instructions
If generally accepted accounting principles were followed, how would the items above relating to research and development activities be reported on the following financial statements?
(a) The company’s income statement for 2017.
(b) The company’s balance sheet as of December 31, 2017.
Be sure to give account titles and amounts, and briefly justify your presentation.
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