Question

Stark Ltd manufactures components for audio-visual systems and on 1 August 2017 commenced a project to design a more effective motion-sensing system. The following expenditures were outlaid during the course of research and development.

During September 2017, Stark Ltd paid $319,000 in salaries of company engineers and consultants to conduct tests on motion-sensing systems currently available in the market, with a view to making possible modifications and obtaining the knowledge.

During November 2017, A new motion-sensing system was designed and a basic model produced at a cost of $215,000. This model was determined to be unsatisfactory as the materials of which it was made were not suitable.

During January 2018, a further $101,000 was incurred in costs for the new motion-sensing system. Stark Ltd purchased a software for the motion-sensing system at a cost of $93,000.

During April 2018, Stark Ltd spent a further $230,000 to incorporate the new material into the design of the new motion-sensing system. By 30 April 2018, Stark Ltd was convinced it now had a viable product, because preliminary tests showed that the new motion-sensing system was far superior to any other available on the market.

During May 2018, Stark Ltd developed a prototype of the motion-sensing system and proceeded to test it with a variety of models of audio visual systems for which they provided components. By the end of May, the motion-sensing system proved to work successfully with the majority of the audio-visual systems available on the market and for which Stark Ltd supplied components. Further costs of $112,000 were incurred in this process. Additional costs of $38,000 were incurred for the workshops to train their manufacturing engineers with the newly developed motion-sensing system.

During June 2018, after receiving positive feedback from their manufacturing engineers of audio visual systems, Stark Ltd decided in June that they had a successful model and commenced planning production of the motion-sensing systems. Expenditures in June included $40,000 to display and demonstrate the new model to prospective purchasers.

Required:

Explain how you would determine the accounting treatment for the items of expenditures mentioned above. Determine and state the items which would be expensed and those which would be capitalised. Provide your reasons in accordance with AASB 138

this is Financial Accounting (from Australia). the AASB 138 can be find online: https://www.aasb.gov.au/Pronouncements/Current-standards.aspx

then select 138 to check

Answer 1

ANSWER

1. Expenditure on Salaries of Engineers and Consultants Will be Expensed as it was Incurred During the Reseach Phase When Economic Benefits for the Produts was not Sure.

2. The Amount $ 215,000 That was Spent on Basic Model but the Model Turns Out to be Unsatisifactory hence the Cost Incurred for the Same will be Expensed out as the Product was not viable in the Market hence it can not be Capitallised.

3. The Amount $ 101,000 Incurred Towords Cost of new Machine Sensing System and $ 93,000 Incurred for the Software of the system Should all so Expensed out as at this Stage also There was no certanity That Economic Benefits will Flow to the Company.

4. The Amount $ 230,000 Spent on new Materials for Looking at the Viability of the Product Shall also be Expensed out as at That Time it was not Certain That the Product will be Successful in the Market.

5. The Amount $ 112,000 Incurred after the Confirmation That the Viable Product is Manufactured will be Capitalied however $ 38,000 Incurred on Training of Staff is Expensed as it is Specifically Excluded by IASB 138.

6. The Amount $ 40,000 Incurred to Display and Demonstrate the new Model to Prospective Customers is the Selling Expenses and hence it is Expensed Out.