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Q12-4CA

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Intermediate Accounting (Kieso)
Found in: Page 648

Short Answer

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.

Instructions

Answer the following questions.

  1. Who are the stakeholders in this situation?
  2. What are the ethical issues involved?
  3. What should Reid do?

Answer

  1. Creditors, investors, and employees.
  2. The ethical issue involved is associated with the long–term versus short-term profit, job security, employee faithfulness, and efficient operation.
  3. Reid must do the best for Corporation C in the long run.
See the step by step solution

Step by Step Solution

Step 1: Meaning of Research and development costs

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.

Step 2: (a) Explaining the stakeholders in the above situation 

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.

Step 3: (b) Explaining the ethical issue 

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.

Step 4: (c) Explaining the situation Reid does 

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.

Most popular questions for Business-studies Textbooks

(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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