Question

A manufacturer of plastic products spent $2,400,000 during the course of 2004 on research and development. $800,000 of this was spent on an unsuccessful attempt to design new and cheaper moulds which would have lasted twice as long as the moulds currently in use; this proved impossible because the moulds would not sustain the temperature of the molten plastic. $1,200,000 was spent on a very successful project to enable the gnomes to be cast in a cheaper form of plastic, and the remaining $400,000 was spent in the rental, heating and lighting costs of the research and development office.

Required: Advise the manufacturer how the expenditure of $2,400,000 should be treated in the income statement (Statement of Profit & Loss) and balance sheet (Statement of Financial Position). Explain your reasoning carefully and indicate any assumptions you make.

Answer 1

$ 1,200,000 of unsuccessful attempt ($800,000)and expenses incurred to research and development which is not seperately attributable to successful project($400,000)  Treated as research expenses in Income statement and $1,200,000 (successful project) treated as an asset in balancesheet and amortize in straight line basis over the project period.

Explanation.

As a basic rule, expenditure on development costs should be written off to the profit and loss account as incurred, as with the expenditure on research. However, under SSAP 13, there is an option to defer the development expenditure and carry it forward as an intangible asset if the following criteria are met:

there is a clearly defined project
expenditure is separately identifiable
the project is commercially viable
the project is technically feasible
project income is expected to outweigh cost
resources are available to complete the project.