Question

Question: Mercury's year-end is September 30, 2014. It commended the development stage of a new pharmaceutical drug on January 1, 2014. $40,000 per month was incurred until the project was completed on June 30, 2014, when the drug went into immediate production. The directors became confident of the project's success on March 1, 2014. The drug has an estimated life span of 5 years and time apportionment is used by mercury where applicable.

Required: Charge to Profit or loss statemnet for the year ended 30 September 2014 including any amortization or development costs?

Answer 1

Answer:

Development costs are capitalised as an intangible asset if all of the following criteria are met:-

a.The technical feasibility of completing the asset so that it will be available for use or sale;

b.The intention to complete the asset and use or sellit;

c.The ability to use or sell the asset;

d.The asset will generate probable future economic benefits and demonstrate the existence of a market or the usefulness of the asset if it is to be used internally;

e.The availability of adequate technical, financial and other resources to complete the development and to use or sell it; and

f.The ability to measure reliably the expenditure attributable to the intangible asset.

In the given case, the development costs should be expensed as incurred, regardless of the probability of success and history. It can not be capitalized because the project has not met all of the capitalisation criteria. The technical feasibility of the project is not yet proven. Regulatory approval has also been not obtained.

Hence, total development cost to be charged to Profit or loss statement for the year ended 30 September 2014 = $40,000 * 9 = $360,000. Since all cost incurred is charged to Profit or loss statement, question of amortization does not arise.