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Chapter 12: Q31. (page 610)

In what situation will the unrealized holding gain or loss on inventory be reported in income?

Short Answer

Expert verified

Unrealized holding gain is reported in income only when it has a qualifying fair value.

Step by step solution

01

Definition of unrealized holding gain

Unrealized holding gain means those gains that the investor gets on the investment without selling the investment.

02

Reported in income statement

The unrealized gain on the inventory is reported as income when it fulfills the criteria of the hedge accounting along with the qualifying fair value. Special hedge accounting has three criteria. The inventory needs to fulfill these criteria to report unrealized holding gain in income. Three criteria of special hedge accounting are designation, documentation, and effectiveness. If the inventory fulfills these criteria, unrealized gains are reported in income.

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Question: (Accounting for Research and Development Costs) Cuevas Co. is in the process of developing a revolutionary new product. A new division of the company was formed to develop, manufacture, and market this new product. As of year-end (December 31, 2017), the new product has not been manufactured for resale. However, a prototype unit was built and is in operation.

Throughout 2017, the new division incurred certain costs. These costs include design and engineering studies, prototype manufacturing costs, administrative expenses (including salaries of administrative personnel), and market research costs. In addition, approximately \(900,000 in equipment (with an estimated useful life of 10 years) was purchased for use in developing and manufacturing the new product. Approximately \)315,000 of this equipment was built specifically for the design development of the new product. The remaining $585,000 of equipment was used to manufacture the pre-production prototype and will be used to manufacture the new product once it is in commercial production.

Instructions

  1. How are “research” and “development” defined in the authoritative literature (GAAP)?
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