Waveland Corporation’s research and development department has an idea for a pro

Question

Waveland Corporation’s research and development department has an idea for a project it believes will culminate in a new product that would be very profitable for the company. Because the project will be very expensive, the department requests approval from you, the company controller.


You recognize that corporate profits have been down lately and are hesitant to approve a project that will incur significant expenses that cannot be capitalized due to the requirement of FASB Statement No. 2. You know that if an outside firm is hired to do the work and a patent is obtained for the process, Waveland Corporation can purchase the patent from the outside firm and record the expenditure as an asset. You know that the company’s own R&D department is first-rate and are confident that they can do the work well.

Who are the stakeholders in this situation? What are the ethical issues involved? What would you do?

Explanation / Answer

Waveland Corporation share holders are the stockholders. Technology-related intangible assets relate to innovations or technological advances. Examples are patented technology and trade secrets granted by the U.S. Patent and Trademark Office. A patent gives the holder exclusive right to use, manufacture, and sell a product or process for a period of 20 years without interference or infringement by others. The two principal kinds of patents are product patents, which cover actual physical products, and process patents, which govern the process of making products. Research and development (R&D) costs are not in themselves intangible assets. We present the accounting for R&D costs here, however, because research and development activities freaquently result in the development of something that a company patents or copyrights. Accounting for R&D Activities: 1.Materials, Equipment, and Facilities. Expense the entire costs, unless the items have alternative future uses, in which case carry as inventory and allocate as consumed,or capitalize and depreciate as used. 2.Personnel. Expenses salaries, wages and other related costs of personnel engaged in R&D as incurred. 3.Purchased Intangibles. 4.Contract Services. 5.Indirect Costs.

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