Question

Energy Ltd is involved in the research and development of a new type of three-finned surfboard. For this R & D it has incurred the following expenditure:

• $50 000 obtaining a general understanding of water-flow dynamics

• $30 000 on understanding what local surfers expect from a surfboard

• $90000 on testing and refining a certain type of fin

• $190 000 on developing and testing a full prototype of the three-finned board, to be called the 'thruster'.

There is expected to be a very large market for the product, which will generate many millions of dollars in revenue.

REQUIRED: - Determine how the above expenditure would be treated for accounting purposes

PLEASE DO NOT COPY OTHERS ANSWER AND PLEASE EXPLAIN IN DETAIL

Answer 1

As per GAAP, all research and development cost should be recorded as expense in P&L account. So as per Gaap all these expenses 50,000+30,000+90,000+1,90,000=360000, will be recorded in P&L account.

But as per IFRS all research cost should be considered as expense and will be recorded in P&L account but development costs will be capitalised.

Here

Research means: Cost related to original and planned investigationundertaken with the prospect of gaining new scientific or technical knowledge and understanding.

And Development Means: Incurred in the application of research findings or other knowledge to a plan or design for the production of newor substantially imroved materials, devices,products,processes, systems or services before the start of commercial production or use.

a)$50000 spent for obtaining a general understanding of water flow dynamics will come under research, because at this time he is just taking the understanding or knowledge and doesnt know what will be the result and will be shown as expense in statement of profit and loss account.

b)$3000  on understanding what local surfers expect from a surfboard will come under research, because at this time he is just taking the understanding or knowledge and doesnt know what will be the result and will be shown as expense in statement of profit and loss account

c) $90000 on testing and refining a certain type of fin will be considered as research and will be recoded in statemt of profit and loss .expense because at this stage he doesnt know what will be the result.

d)$190 000 on developing and testing a full prototype of the three-finned board, to be called the 'thruster' will be considred development cost and will be capitalised because at this stage he knows all these given criteria:

1.the technical feasibility of completing the asset

2.its intention is to complete and sell

3.its ability to sell the asset

4.how the asset wiill generate future economic benefit.

5.the availibity of sufficient resources to complete the development and sell the asset

6.the ability to measure reliably the expenditure incurred on the asset during its development.