Question: (Accounting for Research and Development Costs) Czeslaw Corporation’s research and development department has an idea for a project it believes will culminate in a new product that would be very profitable for the company. Because the project will be very expensive, the department requests approval from the company’s controller, Jeff Reid.
Reid recognizes that corporate profits have been down lately and is hesitant to approve a project that will incur significant expenses that cannot be capitalized due to the requirements of the authoritative literature. He knows that if they hire an outside firm that does the work and obtains a patent for the process, Czeslaw Corporation can purchase the patent from the outside firm and record the expenditure as an asset. Reid knows that the company’s own R&D department is first-rate, and he is confident they can do the work well.
Answer the following questions.
The expense of searching for new and improved goods, new uses of materials, or new or improved technologies is known as research cost. Development investment is incurred to place the outcomes of research on a realistic commercial foundation; therefore, it begins where research ends.
The stakeholders in this circumstance include creditors, investors, and employees, as investors and creditors are concerned about the company's dividends, profitability, and cash flows. Employees at Corporation C are concerned about their job security.
In this case, the ethical issue is taking an idea from the company's R&D department and handing it to an outside business to patent. It is unethical since the outside corporation was not involved in the creation of the idea. Furthermore, it's possible that the outside firm was not involved in the creation of the concept.
Moreover, the outside business may not be able to resell the patent once it has been produced. As a result, it can cancel the contract and sell to a computer. Although it would be less expensive, it would have a negative influence on the firm. As a result, ethical concerns are linked to long-term versus short-term profit, job security, employee loyalty, and efficient operations.
In the long term, Person R must do his best for Corporation C. Person R should focus on completing the job in the most efficient and cost-effective method. The income statement's distribution of reorganization expenses must not be a significant element in the decision-making process.
If Person R does not use the Corporation's research and development department, they must do an acceptable analysis that has an impact on employee morale. Person R can recommend the alternative of hiring an outside business to cover the patent development costs. Person R may assign the money after the consultation, depending on the Board and CEO's decision.
(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
Abandoned projects or projects that benefit the current period
Projects in process—results indeterminate
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.
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.
Margaret Avery Company from time to time embarks on a research program when a special project seems to offer possibilities. In 2015, the company expends $325,000 on a research project, but by the end of 2015, it is impossible to determine whether any benefit will be derived from it.
On January 2, 2017, Raconteur Corp. reported the following intangible assets: (1) copyright with a carrying value of $15,000, and (2) a trade name with a carrying value of $8,500. The trade name has a remaining life of 5 years and can be renewed at nominal cost indefinitely. The copyright has a remaining life of 10 years.
At December 31, 2017, Raconteur assessed the intangible assets for possible impairment and developed the following information.
Estimated Undiscounted Expected Future Cash Flows
Estimated Fair Value
Prepare any journal entries required for Raconteur’s intangible assets at December 31, 2017.
Many stock analysts indicate a preference for less-volatile operating income measures. Such measures make it easier to predict future income and cash flows, using reported income measures. How does the accounting for impairments of intangible assets affect the volatility of operating income?
Many accounting issues involve a trade-off between the primary characteristics of relevant and representationally faithful information. How does the accounting for intangible asset impairments reflect this trade-off?
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