Question

Question: (Accounting for Research and Development Costs) Czeslaw 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 the company’s controller, Jeff Reid.

Reid recognizes that corporate profits have been down lately and is hesitant to approve a project that will incur significant expenses that cannot be capitalized due to the requirements of the authoritative literature. He knows that if they hire an outside firm that does the work and obtains a patent for the process, Czeslaw Corporation can purchase the patent from the outside firm and record the expenditure as an asset. Reid knows that the company’s own R&D department is first-rate, and he is confident they can do the work well.

Instructions

Answer the following questions.

1. Who are the stakeholders in this situation?
2. What are the ethical issues involved?
3. What should Reid do?

Short answer

Answer

1. Creditors, investors, and employees.
2. The ethical issue involved is associated with the long–term versus short-term profit, job security, employee faithfulness, and efficient operation.
3. Reid must do the best for Corporation C in the long run.

Step-by-step solution

Meaning of Research and development costs

The expense of searching for new and improved goods, new uses of materials, or new or improved technologies is known as research cost. Development investment is incurred to placethe outcomes of research on a realistic commercial foundation; therefore, it begins where research ends.

(a) Explaining the stakeholders in the above situation 

The stakeholders in this circumstance include creditors, investors, and employees, as investors and creditors are concerned about the company's dividends, profitability, and cash flows. Employees at Corporation C are concerned about their job security.

(b) Explaining the ethical issue 

In this case, the ethical issue is taking an idea from the company's R&D department and handing it to an outside business to patent. It is unethical since the outside corporation was not involved in the creation of the idea. Furthermore, it's possible that the outside firm was not involved in the creation of the concept.

Moreover, the outside business may not be able to resell the patent once it has been produced. As a result, it can cancel the contract and sell to a computer. Although it would be less expensive, it would have a negative influence on the firm. As a result, ethical concerns are linked to long-term versus short-term profit, job security, employee loyalty, and efficient operations.

(c) Explaining the situation Reid does 

In the long term, Person R must do his best for Corporation C. Person R should focus on completing the job in the most efficient and cost-effective method. The income statement's distribution of reorganization expenses must not be a significant element in the decision-making process.

If Person R does not use the Corporation's research and development department, they must do an acceptable analysis that has an impact on employee morale. Person R can recommend the alternative of hiring an outside business to cover the patent development costs. Person R may assign the money after the consultation, depending on the Board and CEO's decision.