FAR: R&D: 3/31/2018 Flashcards
Which of the following is a research and development cost?
1) Development or improvement of techniques and processes
2) Offshore oil exploration that is the primary activity of a company
3) Research and development performed under contract for others
4) Market research related to a major product for the company
Development or improvement of techniques and processes
Market research is specifically excluded from the list of activities constituting R & D under ASC 730 .
Which of the following is the proper treatment of the cost of equipment used in research and development activities that will have alternative future uses?
1) Expensed in the year in which the research and development project started.
2) Capitalized and depreciated over the term of the research and development project.
3) Capitalized and depreciated over its estimated useful life.
4) Either capitalized or expensed, but not both, depending on the term of the research and development project
Capitalized and depreciated over its estimated useful life.
Equipment that is used in research and development activities and has alternative future uses should be depreciated over its estimated useful life. During the time that the equipment is used for R&D activities the depreciation will be recorded as R&D expense. When the equipment is no longer used in R&D activities the depreciation will be recorded as depreciation expense.
During 2005, Kent Co. incurred $204,000 of research and development costs in its laboratory to develop a patent that was granted on July 1, 2005. Legal fees and other costs associated with registration of the patent totaled $41,000. The estimated economic life of the patent is 10 years.
What amount should Kent capitalize for the patent on July 1, 2005?
1) $245,000
2) $204,000
3) $41,000
4) $0
$41,000
This answer includes the amount of research and development costs incurred. However, these costs are expensed under ASC 730. All research and development is expensed as incurred. Only the registration costs are capitalized.
Cody Corp. incurred the following costs during 2006:
Design of tools, jigs, molds, and dies involving new technology $125,000
Modification of the formulation of a process 160,000
Troubleshooting in connection with breakdowns during commercial production 100,000
Adaption of an existing capability to a particular customer’s need as part of a continuing commercial activity 110,000
In its 2006 income statement, Cody should report research and development expense of
1) $125,000.
2) $160,000.
3) $235,000.
4) $285,000.
$285,000.
This answer excludes the first listed item, which is included in R & D because it is part of a research or development activity. It is specifically listed in ASC 730 as an item meeting the definition of R & D.
Heller Co. incurred the following costs in 2005:
Research and development services performed by Kay Corp. for Heller $150,000
Testing for evaluation of new products 125,000
Laboratory research aimed at discovery of new knowledge 185,000
What amount should Heller report as research and development costs in its income statement for the year ending December 31, 2005?
1) $125,000
2) $150,000
3) $335,000
4) $460,000
$460,000
This answer excludes testing. But testing for evaluation of new products is found in the ASC 730 list of costs included in research and development.
Question 13
During 2005, Orr Co. incurred the following costs:
Research and development services performed by Key Corp. for Orr $150,000
Design, construction, and testing of preproduction prototypes and models 200,000
Testing in search for new products or process alternatives 175,000
In its 2005 income statement, what should Orr report as research and development expense?
1) $150,000
2) $200,000
3) $350,000
4) $525,000
$525,000
This is the sum of the first two costs in the list. These costs are properly included in R & D; however, the third cost is included as well for a total of $525,000.
