Question

Al Mavali Enterprise is a manufacturer of engines for high-tech buses. The enterprise was engaged in the business of providing engineering and support services to bus manufacturers. On 1st January, 2018, the enterprise has received a fresh order from Tamin Corporation a leading bus manufacturer in a country. Tamin Corporation ordered Al Maveli Enterprise to develop a new design of electronic turbo engine, for that Tamin Corporation has sent all technical specifications. Al Maveli Enterprise was in need of funds for completing this order. The total fund required for this project was OMR 270,000. So, the enterprise mobilizes this amount of fund by availing long term loan from the enterprise’s bank. Below are the details of expenses incurred for this research and development project.

 Salaries paid to engineers and technicians on 20th February 2018 was OMR 47,250

On 8th April, 2018 the test model was developed at a cost of OMR 67,500

 On 12th July, 2018 the cost of revising the test model was for OMR 81,000

 First test model was developed on 31st July, 2018 at a cost of OMR 21,600

 On 20th November, 2018 a conference was conducted and technical experts were invited for the introduction of newly designed engine. The expenses of the conference were OMR 13,500

 On 23rd December, 2018 the new product development electronic turbo engine was achieved. According to Al Maveli Enterprise the budgeted net profit for the year 2018 was OMR 243,000.
Required: On the role of an accountant assess the proper accounting treatment relating to the research and development project of developing a new electronic turbo engine for high-tech buses in the financial statements for the year 2018.

Answer 1

Listed below is the accounting treatement relating to the research and development project of developing a new electronic turbo engine for high-tech buses.

Interest Cost on the Long Term Loan - This cost will be capitalized

Salaries paid to engineers and technicians - This cost will be capitalized

Cost of Development of Test Model - This cost will be capitalized

Cost of revising the test model - This cost will be capitalized

Cost of Development of First Model - This cost will be capitalized

Cost of Conference - This cost will be charged to Profit & Loss Account

As mentioned above all the costs have to be capitalised except for cost of conference, which will not have any recurring value. The rest of the costs are incurred for the development of the turbo engine and should be capitalised as Patent and Know-how and depreciated over the estimated useful life of the asset in the financial statements of Al Mavali Enterprise.