During 2012, Robin Wright Tool Company purchased a building site for its propose

Question

During 2012, Robin Wright Tool Company purchased a building site for its proposed research and development laboratory at a cost of $64,660. Construction of the building was started in 2012. The building was completed on December 31, 2013, at a cost of $340,700 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.

16

$92,770

$58,680

9

66,190

19,770

4

48,940

11,380

29

$207,900

$89,830

Upon recommendation of the research and development group, Robin Wright Tool Company acquired a patent for manufacturing rights at a cost of $86,000. 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?

The company’s income statement for 2014.

Robin Wright Tool Company
Income Statement (Partial)

Number
of Projects Salaries and Employee
Benefits Other Expenses
(excluding Building
Depreciation Charges) Completed projects with long-term benefits

16

$92,770

$58,680

Abandoned projects or projects that    benefit the current period

9

66,190

19,770

Projects in process—results indeterminate

4

48,940

11,380

Total

29

$207,900

$89,830

Explanation / Answer

Answer:

Robin Wright Tool Company Income statement (Partial) Amortization expenses: Amortization of Patent 8600 ($86,000/10 years) Explanation: Intangible assets like patents arerequired to be amortized over its legal period. Research & development expenses: In$ Salaries and Employee
Benefits 207900 Other expenses(excluding depreciation) 89830 Depreciation on building 17035 ($340700/20 years) Total 314765 Explanation: As per US GAAP all expenses relating to research and development should be expenses as incurred.

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