CHAPTER 67

RESEARCH AND DEVELOPMENT COST

Problem 67-1 (AICPA Adapted)

Ward Company incurred the following research and development costs in the current year:

Equipment acquired for use in various R and D projects 975,000

Depreciation on the above equipment 135,000
Materials used 200,000
Compensation costs of personnel 500,000
Outside consulting fees 150,000
Indirect costs appropriately allocated 250,000

What total amount of research and development costs should be recognized as expense for the
current year?
a. 850,000
b. 1,085,000
c. 1,235,000
d. 1,825,000

Solution 67-1 Answer c

Depreciation of equipment 135,000
Materials used 200,000
Compensation cost of personnel 500,000
Outside consulting fees 150,000
Indirect costs allocated 250,000
1,235,000

Expenditures for research and development which have alternative future use, either in
additional research project or for productive purposes, can be capitalized.

This means that costs incurred for equipment and intangible asset related to research and
development activities which have an alternative future use can be capitalized.

Subsequently, the depreciation of the equipment and the amortization of the intangible asset
should be charged to research and development expense.
Problem 67-2 (AICPA Adapted)
Ball Company incurred the following research and development costs during the current year:

Direct costs of doing contract research and development

work for the government to be reimbursed by the
government unit 400,000
Depreciation 300,000
Salaries 700,000
Indirect costs appropriately allocated 200,000
Materials used 180,000

What total amount of research and development costs should be reported as expense in the
current year?
a. 1,080,000
b. 1,380,000
c. 1,580,000
d. 1,780,000

Solution 67-2 Answer b

Depreciation 300,000
Salaries 700,000
Indirect costs allocated 200,000
Materials 180,000
Total research and development expense 1,380,000

Research and development performed under contract for others should not be treated as
expense if the direct costs are specifically reimbursable under the contract.

Problem 67-3 (AICPA Adapted)

West Company made the following expenditures relating to Product Y.

Legal costs to file a patent on Product Y. Production

of the finished product would not have been
undertaken without the patent 100,000

Special equipment to be used solely for development

of Product Y. The equipment has no other use
and has an estimated useful life of four years. 600,000
Labor and material costs incurred in producing
a prototype model 2,000,000
Cost of testing the prototype 800,000

What is the total amount of costs that should be expensed when incurred?
a. 2,800,000
b. 2,950,000
c. 3,400,000
d. 3,500,000

Solution 67-3 Answer c

Special equipment used solely for Product Y 600,000
Labor and material costs 2,000,000
Cost of testing prototype 800,000
Total research and development expense 3,400,000

The legal costs incurred to file a patent should be charged to the patent account.
The special equipment is expensed immediately because it is used solely for the development of
Product-Y.

Problem 67-4 (AICPA Adapted)

Koral Company incurred the following costs year:

Modification to the formulation of a chemical product 135,000

Trouble-shooting in connection with breakdowns
during commercial production 150,000
Design of tools, jigs, molds and dies involving
new technology 170,000
Seasonal or other periodic design changes to
existing products 185,000
Laboratory research aimed at discovery
of new technology 215,000

What total amount should be reported as research and development expense for the current
year?
a. 520,000
b. 470,000
c. 385,000
d. 335,000

Solution 67-4 Answer a

Modification to the formulation of a chemical product 135,000
Design of tools, jigs, molds and dies 170,000
Laboratory research 215,000
Total research and development expense 520,000

Research and development activities typically occur prior to the commercial production and
distribution of a product or process.

Thus, the trouble shooting in connection with breakdown and seasonal or other periodic change
to existing products are not R and D activities because they relate to the commercial production.

Problem 67-5 (AICPA Adapted)

Cody Company incurred the following costs during the current year:

Design of tools, jigs, molds, and dies

involving new technology 125,000
Modification of the formulation of a process 160,000
Trouble-shooting in connection with breakdowns
during commercial production 100,000
Adaptation of an existing capability to a particular
customer's need as part of a continuing
commercial activity 110,000

What total amount should be reported as research and development expense for the current
year?
a. 125,000
b. 160,000
c. 235,000
d. 285,000

Solution 67-5 Answer d

Design of tools, jigs and dies 125,000
Modification of the formulation of a process 160,000
Total R and D expense 285,000
The trouble shooting and adaptation of an existing capability are not research and development
activities because such costs relate to commercial production.

Problem 67-6 (AICPA Adapted)

Dell Company incurred the following costs during the current year:

Routine on-going efforts to refine, enrich, or

otherwise improve an existing product 125,000
Design, construction and testing of preproduction models 110,000
Quality control during commercial production
including routine testing of products, 150,000
Laboratory research for discovery of new knowledge 180,000

What total amount should be reported as research and development expense?

a. 235,000
b. 275,000
c. 299,000
d. 330,000

Solution 67-6 Answer c

Design, construction and testing of models 110,000
Laboratory research 180,000
Total research and development expense 290,000

Problem 67-7 (AICPA Adapted)

During the current year, Orr Company incurred the following costs:

Research and development services

performed by Key Company for Orr; 150,000
Design, construction and testing of preproduction prototypes 200,000
Testing in search for new products or process alternatives 175,000

What should be reported as research and development expense?

a. 150,000
b. 200,000
c. 350,000
d. 525,000
Solution 67-7 Answer d
All costs incurred are charged to research and development expenses immediately.

Problem 67-8 (IAA)

Courage Company incurred the following costs in the current year:

R and D equipment with useful life of four years in

various R and D projects 18,000,000
Start-up costs incurred when opening a new plant 4,200,000
Advertising expense to introduce a new product 2,100,000
Engineering costs incurred to advance a product to full
production stage but economic viability is not yet achieved 1,200,000

What amount should be recorded as research and development expense?

a. 1,650,000
b. 2,220,
c. 3,000,000
d. 3,420,000

Solution 67-8 Answer a

R and D equipment (1,800,000/4) 450,000
Engineering costs 1,200,000

Total R and D expense 1,650,000

Problem 67-9 (IAA)

Fear Company incurred the following costs during the current year:

Laboratory research aimed at discovery of new knowledge 200,000

Cost of testing prototype but economic viability not achieved
50,000 Quality control during commercial production
300,000
Construction of research facility having an estimated
useful life of 5 years but no alternative future use 400,000

What is the total amount of research and development expense?

a.630,000
b. 330,000
c.650,000
d. 950,000

Solution 67-9 Answer c

R and D expense (200,000 + 50,000+ 400,000) 650,000

Problem 67-10 (AICPA Adapted)

During the current year, Montana Company began and development project. The project was
completed and production of the developed product began in later part of the year

All of the following expenditures were included in the Research and Development expense
account:

Salaries and wages for laboratory research 1,000,000

Design of preproduction prototype 200,000
Quality control during commercial production 100,000
Materials and supplies consumed for laboratory research 400,000
Construction of preproduction prototype 150,000
Purchase of equipment used solely for the project with
useful life of 5 years 600,000
Patent filing and legal fee for completed project 50,000
Payment to others for research 300,000
Cost of adapting the new monitor for the specific
needs of a customer 250,000

What amount should be reported as research and development expense?

a. 2,650,000
b. 2,170,000
c. 2,050,000
d. 2,350,000

Solution 67-10 Answer a

Salaries and wages 1,000,000
Design of preproduction prototype 200,000
Materials and supplies consumed for laboratory research 400,000
Construction of preproduction prototype 150,000
Equipment used solely for the project 600,000
Payment to others for research 300,000
Total research and development expense 2,650,000

Problem 67-11 (IAA)

Metal Company incurred the following costs during the current year:
Laboratory research aimed at discovery of
new knowledge 750,000
Design of tools, jigs, molds and dies involving
new technology 220,000
Quality control during commercial production,
including routine testing 350,000
Equipment acquired two years ago, having an estimated
useful life of five years with no residual value, used
in various R and D projects 1,500,000
Research and development services performed by
Stone Company for Metal Company 230,000
Research and development services performed by
Metal Company for Kaye Company 20,000

What amount of research and development expense should be reported in the current year?
a. 1,200,000
b. 1,500,000
c. 1,870,000
d. 2,170,000

Solution 67-11 Answer b.

Laboratory research 230,000
Design of tools, jigs, molds and dies 220,000
Depreciation of equipment (1,500,00075) 300,000
R and D performed by Stone for Metal 230,000
Total R and D expense 1,500,000

The quality control is not research and development activity because it relates to commercial
production.

The research and development services performed by Metal Company for Kaye Company are
reimbursable and therefore should not be treated as expense.
Problem 67-12 (IAA)
Jess Company incurred the following during the current year:
Equipment purchased for current and future projects,
5-year useful life 100,000
Equipment purchased for current project only,
5-year useful life 200,000
Research and development salaries of current project 400,000
Legal fees to obtain patent 50,000
Material and labor costs for prototype product 600,000

What amount should be recognized as research and development expense?

a. 1,220,000
b. 1,000,000
c. 1,300,000
d. 1,060,000

Solution 67-12 Answer a

Depreciation of equipment for current and future projects
(100,000 / 5 years) 20,000
Equipment purchased for current project only 200,000
Research and development salaries 400,000
Material and labor costs 600,000
Total R and D expense 1,220,000

The legal fees to obtain patent should be capitalized as cost of patent.

Problem 67-13 (AICPA Adapted)

Brunson Company, a major winery, began construction of a new facility in Mindanao. The
following costs are incurred in conjunction with the start-up activities of the new facility:

Production equipment 8,150,000

Travel costs of salaried employees 400,000
License fees 140,000
Training of local employees for production and
maintenance operations 1,200,000
Advertising costs 850,000

What portion of the organization costs should be expensed?

a. 9,750,000
b. 1,600,000
c. 1,390,000
d. 0

Solution 67-13 Answer b

Travel costs of salaried employees 400,000
Training of local employees 1,200,000
Total start-up costs to be expensed 1,600,000
The production equipment definitely should be capitalized.

The license fees and advertising costs are operating expenses and not embraced in the definition
of start-up costs.

The organization costs contemplated in this problem squarely pertain to start-up costs.

Under PAS 38, paragraph 69, start-up costs are expensed immediately. Start-up costs may consist
of:
a. Establishment costs, such as legal and secretarial costs incurred
in establishing a legal entity.
b. Preopening costs -- expenditures incurred in opening a new
facility.
c. Preoperating costs - expenditures incurred for commencing or launching a
new product.