In: Accounting
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 |
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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 | |