CHAPTER 64 RESEARCH AND DEVELOPMENT COST Problem 64-1 (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 64-1 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. : Sub: tly, the depreciation of the equipment and the amortization of the neatly ie eset should be charged to research and development expense. ; 7158Problem 64-2 (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 64-2 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 Sor others should not be treated as expense if the direct costs are specifically reimbursable under the contract. : 7159Problem 64-3 (AICPA Adapted) West Company made the following expenditures relating to Product ¥. Legal costs to file a patent on Product Y. Production of the finished product would not have been * undertaken without the patent 100,006 Special equipment to be used sclely 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 total amount of costs should be expensed when incurred? 2,800,000 2,950,000 3,400,000 3,500,000 BO TP Solution 64-3 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 eee A 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. 760Problem 64-4 (AICPA Adapted) Koral Company incurred the following costs during the current 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 64-4 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 ofa product or Process, Thus, the trouble shooting in connection with breakdown and seasonal or other periodic changes to existing products are not Rand D activities - because they relate to the commercial production. 761Problem 64-5 (AICPA Adapted) . Cody Company incurred the following costs during the current year: j 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 i 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 64-5 Answer d Design of tools, jigs and dies ua 125,000 Modification of the formulation of a process 160,000 Total R and D expense aa P 285,000 The trouble shooting and adaptation of an existing capability are not research and development activities because such costs relate to commercial production. 762Problem 64-6 (AICPA Adapted) Dell Company incurred the following costs during the current year: Routine on-going efforts to refine, enrich, of 4 otherwise improve an existirig product 125,000 Design, construction and testing of preproduetion 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. 290,000 d. 330,000 Solution 64-6 Answer c Design, construction and testing of models 110,000 Laboratory research 180,000 Total research and developinent expense Problem 64-7 (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 total amount should be reported as research and development expense? : a. 150,000 b. 200,000 c. 350,000 d. 525,000 Solution 64-7 Answer d All costs incurred are charged to research and development expense immediately. 763Problem 64-8 (IAA) Courage Company incurred the following costs in the current year: Rand D equipment with useful life of four years in various R and D projects 1,800,000 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 yetachieved 1,200,000 What amount should be recorded as research.and development expense? a. 1,650,000 b. 2,220,000 c. 3,000,000 d. 3,420,000 Solution 64-8 Answer a Rand D equipment (1,800,000 / 4) 450,000 Engineering costs 1,200,000 Total R and D expense 1,650,000 Problem 64-9 (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 #iability not achieved 50,000 Quality contro! 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 64-9 Answer c Rand D expense (200,000 + 50,000 + 400,000) 650,000 . 764Problem 64-10 (AICPA Adapted): : < the beginning of current year, West Company purchased two aie peas iP 000,000 each, The machines were put into use Machine A has a useful life of 5 years and can be used only in one research project. Machine B will be used for 2 years ona research and development project and then used by the production division for an. additional 8 years The entity used the straight line method of depreciation. What amount should be recognized as research and development expense for the current year? a. 2,000,000 b. 1,500,000 c. 1,100,000 d. 300,000 Solution 64-10 Answer c ; Machine A — charged entirely to expense 1,000,000 Machine B — (1,000,000 / 10) 100,000 Total R and D expense 1,100,000 Problem 64-11 (AICPA Adapted) During the current year, Beta Company incurred the following costs related to a new solar-powered car: . Salaries of laboratory employees researching how to build the new car 2,500,000 Legal fees for the patent application for the new car 200,000 Engineering follow-up during the early stages of commercial production and the follow up occurred during the current year * 500,000 Marketing research to promote the new car 300,000 Design, testing and construction of prototype _ 4,000,000 What amount should be reported as research and development expense for the current year? a. 7,500,000 b. 6,500,000 c. 2,500,000 d. 7,200,000 Solution 64-1] Answer b : Salaries of laboratory employees 2,500,000 Design, testing and construction of prototype 4,000,000 Total R and D expense : 6,500,000 I65Problem 64-12 (AICPA Adapted) During the current year, Montana Company began work on a research and development project. The project was completed and commercial 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 64-12 Answer a Salaries and wages 1,000,000 Design of preproduction prototype Materials and supplies consumed for laboratory research Construction of preproduction prototype Equipment used solely for the project Payment to others for research Total research and development expense 166Problem 64-13 (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 invotving 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. ,870,000 d. 2,170,000 Solution 64-13 Answer b fab Laboratory research 750,000 Design of tools; jigs, molds and dies 220,000 Depreciation of equipment (1,500,000 /5) 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. 167Problem 64-14 (IAA) Jess Company incurred the following research and development costs * 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 Reasearch 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;600 c. 1,300,000 d. 1,060,000 Solution 64-14 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. 768Problem 64-15 (AICPA Adapted) Brunson Company, amajor winery, began construction ofa 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 bicense fees _ 140,000 raining 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 64-15 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 : as ‘° 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, suchas legal and secretarial costs incurred in establishing a legal entity. / H i A b. Preopening costs — expenditures incurred in opening anew facility. c. Preoperating costs — expenditures incurred for commencing of launching a new product. , 769