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Intermediate Accounting (Kieso)
Found in: Page 637

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Short Answer

Research and development activities may include (a) personnel costs, (b) materials and equipment costs, and (c) indirect costs. What is the recommended accounting treatment for these three types of R&D costs?

Research and development activities may include personnel costs, materials and equipment costs, and indirect costs. Their treatment is explained below.

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Step by Step Solution

Step 1: R&D Costs

R&D costs are directly related to the research and development of a company's goods or services and any intellectual property created in the process. R&D costs are often incurred when a firm is looking for and developing new goods or services.

Step2: Accounting Treatment

(a) In R&D operations, personnel (labor) expenditures should be expensed as incurred.

(b)Materials and equipment expenditures should be expensed right away unless the goods have other uses in the future. Materials should be documented as inventories and allocated as consumed, and equipment should be capitalized and depreciated as utilized if the assets have alternative future uses.

(c)Indirect R&D expenditures shall be fairly attributed to R&D and expensed (except general and administrative costs, which must be clearly connected to be included).

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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