Question

During 2012, Robin Wright Tool Company purchased a building site for its proposed research and development laboratory at a cost of $67,290. Construction of the building was started in 2012. The building was completed on December 31, 2013, at a cost of $310,800 and was placed in service on January 2, 2014. 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 2014 appears below. Number of Projects Salaries and Employee Benefits Other Expenses (excluding Building Depreciation Charges) Completed projects with long-term benefits 16 $90,210 $51,310 Abandoned projects or projects that    benefit the current period 9 66,880 15,570 Projects in process—results indeterminate 4 45,150 13,410 Total 29 $202,240 $80,290 Upon recommendation of the research and development group, Robin Wright Tool Company acquired a patent for manufacturing rights at a cost of $94,000. The patent was acquired on April 1, 2013, 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?

Answer 1

(a)       Income statement items and amounts for the year ended December 31, 2014:

Research and development expenses*...................................	$298,070
Amortization of patent ($94,000 ÷ 10 years)..................	9,400

           *The research and development expenses could be listed by the components rather than in one total. The details of the research and development expenses are as follows:

Depreciation—building
($310,800 ÷ 20 years)......................................................	$ 15,540
Salaries and employee benefits..............................................	202,240
Other expenses.......................................................................	80,290

(b)       Balance sheet items and amounts as of December 31, 2014:

Land........................................................................................ ................................................................................................	$ 67,290
Building (net of accumulated depreciation    of $15,540)...........................................................................	295,260
Patent (net of amortization of $16,450)*................................	77,550
*([$94,000 ÷ 10] X 3/4) + ($94,000 ÷ 10)

            All research and development costs should be charged to expense when incurred. Therefore, all of Robin Wright Tool Company’s costs related to its research and development activities for 2014 would be expensed regardless of the long-term benefits.

            The patent was acquired for manufacturing rights rather than for use in research and development activities. Consequently, the cost of the patent can be capitalized as an intangible asset and amortized over its useful life.