In: Accounting
During 2015, Sheridan Company purchased a building site for its
proposed research and development laboratory at a cost of $50,000.
Construction of the building was started in 2015. The building was
completed on December 31, 2016, at a cost of $360,000 and was
placed in service on January 2, 2017. The estimated useful life of
the building for depreciation purposes was 20 years. The
straight-line method of depreciation was to be employed, and there
was no estimated residual value.
Management estimates that about 50% of the projects of the research
and development group will result in long-term benefits (i.e., at
least 10 years) to the corporation. The remaining projects either
benefit the current period or are abandoned before completion. A
summary of the number of projects and the direct costs incurred in
conjunction with the research and development activities for 2017
appears below.
Number of Projects |
Salaries and Employee Benefits |
Other Expenses (excluding Building Depreciation Charges) |
||||
Completed projects with long-term benefits |
20 |
$90,000 |
$51,000 |
|||
Abandoned projects or projects that | ||||||
benefit the current period |
15 |
51,000 |
17,000 |
|||
Projects in process—results indeterminate |
5 |
39,000 |
14,000 |
|||
Total |
40 |
$180,000 |
$82,000 |
Upon recommendation of the research and development group, Sheridan
Company acquired a patent for manufacturing rights at a cost of
$116,000. The patent was acquired on April 1, 2016, and has an
economic life of 10 years.
If generally accepted accounting principles were followed, how
would the items above relating to research and development
activities be reported on the following financial statements?
(a)The company's income statement for 2017.
(b)The company's balance sheet as of December 31, 2017.
Sheridan Company | ||||
a) | Income Statement item & amount for December 31st,2017 | |||
* | Research & Development Expenses | $ 2,80,000.00 | ||
Less: Amortization of Patent($116000/10) | $ 11,600.00 | |||
* | Research & Development Expenses | |||
Depreciation on Building=($360000/20) | $ 18,000.00 | |||
Salaries & Employees Benefits | $ 1,80,000.00 | |||
Other Expenses | $ 82,000.00 | |||
Total Resarch & Development Expenses | $ 2,80,000.00 | |||
b) | Balance Sheet items & amount for December 31st,2017 | |||
Land | $ 50,000.00 | |||
Building net($360000-($360000/20)) | $ 3,42,000.00 | |||
Patent (Net of Amortization)=($116000-$20300) | $ 95,700.00 | |||
Patent Amortization in 2016 for 9 months(April to December) | (116000/10)*9/12= | $ 8,700.00 | ||
Patent Amortization in 2017 for 12 months(Jan to December) | (116000)/10= | $ 11,600.00 | ||
Total of Amortization of Patent | $ 20,300.00 | |||
Note: | ||||
The Patent was acquired for manufacturing right so it will be Capitalized as intangible assets & amortized over its useful life. | ||||
All Resarch & Development expenses should be charged as an expense in the year of purchased. |