Doobie Brothers Co. capitalizes research and development costs because they are optimistic about the the product...

Doobie Brothers Co. capitalizes research and development costs because they are optimistic about the the product they are developing. What effect will this have on the financial statements?

Select one:
a. Financial Statements will be correct because this is the correct accounting treatment when a company is optimistic about research and development costs.
b. Assets - Overstated; Liabilities - Correct; Equity - Overstated
c. Assets - Overstated; Liabilities - Correct; Equity - Understated
d. Assets - Understated; Liabilities - Correct; Equity - Understated
e. Assets - Understated; Liabilities - Overstated; Equity - Understated
f. The correct answer is not in this set of solutions.

Solutions

Expert Solution

Doobie Brothers Co. capitalizes research and development costs because they are optimistic about the the product they are developing. What effect will this have on the financial statements?

The correct answer is OPTION A i.e Financial Statements will be correct because this is the correct accounting treatment when a company is optimistic about research and development costs.

Explanation

Being optimistic about the product means that the company is confident and sure enough that the research will be successful.

It also suggests that the company can capitalize such research and development costs because they are optimistic about the product they are developing. It means that the product will be an asset for the company.

So, financial statements will be correct because this is the correct accounting treatment when a company is optimistic about research and development costs.

Other options like :

Assets - Overstated; Liabilities - Correct; Equity - Overstated
Assets - Overstated; Liabilities - Correct; Equity - Understated
Assets - Understated; Liabilities - Correct; Equity - Understated
Assets - Understated; Liabilities - Overstated; Equity - Understated

are incorrect when the company is optimistic about any product.

ekkarill92 answered 1 year ago

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