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Problem 12-6 During 2015, Crane Company purchased a building site for its proposed research and development...

Problem 12-6

During 2015, Crane Company purchased a building site for its proposed research and development laboratory at a cost of $54,000. 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

19

$90,000

$57,000

Abandoned projects or projects that
   benefit the current period

10

51,000

17,000

Projects in process—results indeterminate

9

40,000

14,000

Total

38

$181,000

$88,000


Upon recommendation of the research and development group, Crane Company acquired a patent for manufacturing rights at a cost of $120,000. 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?

The company’s income statement for 2017. (Do not round intermediate calculations and round final answer to 0 decimal places, e.g. 5,275.)

Crane Company

Income Statement (Partial)

Research and Development Expenses $___________
Amortization of Patent $12000

Solutions

Expert Solution

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Research and Development should be charged to expense account as and when they incur. Hence all of the compnay cost realted to R&D will be expensed in 2017 no matter how long the benefit are.

Patent is for manufacturing rights and hence is intangible asset and amortization is NOT R&D expense.

Income Statement:
Amortization Expense (120000/10) 12000
Research and Development Expense (Working-1 and Note above) 287000
Working-1
Research and Development Expense:
Depreciation Building 360000/20 18000
Salaries and Employee benefits 181000
Othr Expense 88000
287000
Balance Sheet:
Land 54000
Building (360000-18000) 342000
Patent (Working-2) 99000
Working-2
Patent Cost 120000
Less: Depreciation for 2016 (9 Months) 120000/10*9/12 9000
Less: Depreciation for 2017 12000
Book Value at end of 2017 99000

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