Question

On its annual income statement, Star Laboratories reported research and development expense of $1,422,000,000. Which of the following statements must be true?

Select one:

a. Star Laboratories spent $1,422,000,000 in cash to develop new products and improve old products.

b. Research and development expense reduced Star Laboratories annual net income by $1,422,000,000 .

c. Star Laboratories capitalized at least $1,422,000,000 of research and development costs for the year.

d. The $1,422,000,000 included amortized research and development costs from prior years that were not previously expensed, because Star Laboratories incurs such expenses each year.

e. None of these are correct.

Answer 1

SOLUTION:

A)THIS STATEMENT IS NOT CORRECT

(Star Laboratories spent $1,422,000,000 in cash to develop new products and improve old products) AS STAR LABORATORIES INCLUDED IN RESEARCH AND DEVELPOMENT EXPENSE CERTAIN NON CASH EXPENSES SUCH AS DEPRECIATION ON RELATED ASSETS

B)THIS STATEMENT IS NOT CORRECT

(Research and development expense reduced Star Laboratories annual net income by $1,422,000,000 ), AS STAR LABORATORIES RECORDED DEFFERED TAX EXPENSE ON THE PRODUCT DEVELOPMENT EXPENSE,THUS NET INCOME WAS AFFECTED ON AN AFTER TAX BASIS

C)THIS STATEMENT IS NOT CORRECT

(Star Laboratories capitalized at least $1,422,000,000 of research and development costs for the year)UNDER US GAAP, FIRMS MAY NOT CAPITALISE RESEARCH AND DEVELOPMENT COSTS.

D)THIS STATEMENT IS NOT CORRECT

(The $1,422,000,000 included amortized research and development costs from prior years that were not previously expensed, because Star Laboratories incurs such expenses each year)

ALL RESEARCH AND DEVELPOMENT EXPENSES MUST BE INCLUDED IN THE INCOME STATEMENT MUST BE INCLUDED IN THE INCOME STATEMENT IN THE PERIOD.

E)THE CORRECT ANSWER IS NONE OF THESE ARE CORRECT