Question

13. Bankstown Limited was involved in a highly successful plastics manufacturing business. It commenced a project to design a more efficient extrusion system for its plastic pipes. The following outlays occurred: September: researcher salaries $30 000; October: research materials $40 000; November: re-development of the extrusion plant $250 000; December: final adjustments to the extrusion plant $25 000. The amount to be expensed by Bankstown Limited at the end of the financial year, 31 December, is

Answer 1

According to the Financial Accounting Standards Board, or FASB, generally accepted accounting principles, or GAAP, require that most research and development costs be expensed in the current period. However, companies may capitalize some software research and development, or R&D, costs if such cost or asset has alternate future use. FASB defines research as a planned search or investigation to discover new knowledge; it defines development as the translation of research findings into a plan or design.

In certain situations, a company can treat some of its R&D costs as noncurrent assets. This process is called capitalization and requires the costs to be expensed over a set number of years. If the costs relate to tangible assets that have an alternative future use, the company depreciates the costs over the assets’ projected lifetimes. Similarly, the company amortizes capitalized costs that relate to intangible assets, such as patents and trademarks. Some development expenses, such as those for market research and consumer testing, do not count as R&D costs.

Here, we can classify the cost incurred on research as follows:-

Particulars	Expense	Expensed or capitalised
Research salaries	30,000	Expensed. Because no future use.
Research materials	40,000	Expensed. Because no future use.
Re-development of plant	250,000	Capitalised. Because future use.
Final Adjustments	25,000	Capitalised. Because future use.

So, amount to be expensed at the end of financial year December 31, is

= $30,000 + $40,000

= $70,000