Question

(Accounting for R&D Costs) In 2015, Wright Tool Company purchased a building site for its proposed research and development laboratory at a cost of \(60,000. Construction of the building was started in 2015. The building was completed on December 31, 2016, at a cost of \)320,000 and was placed in service on January 2, 2017. 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 2017 appears below.

	Number of Projects	Salaries and Employee Benefits	Other Expenses (excluding Building Depreciation Charges)
Completed projects with long-term benefits	15	\( 90,000	\)50,000
Abandoned projects or projects that benefit the current period	10	65,000	15,000
Projects in process—results indeterminate	5	40,000	12,000
Total	30	\(195,000	\)77,000

Upon recommendation of the research and development group, Wright Tool Company acquired a patent for manufacturing rights at a cost of $88,000. The patent was acquired on April 1, 2016, and has an economic life of 10 years.

Instructions

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?

(a) The company’s income statement for 2017.

(b) The company’s balance sheet as of December 31, 2017.

Be sure to give account titles and amounts, and briefly justify your presentation.

Short answer

1. Amortization of patent = $8,800
2. Total patent amount = $72,600

Step-by-step solution

Meaning of R&D cost 

R&D cost (Research and Development cost) is the type of cost incurred by a company to create new products or processes which may or may not result in commercially practical things. The common rule is that the investigation and advancement costs are to be expensed instantly when the costs are caused.

(a) Preparing income statement for 2017

Income statement items and amounts for the year ended December 31, 2017:

Research and development expenses	$288,000
Amortization of patent	8,800

Working notes:

Calculation of amortization of patent

$$\begin{gathered} \text{Amortization}\text{of}\text{patient}=\frac{\text{Patent}\text{cost}}{\text{Useful}\text{life}} \\ \text{Amortization}\text{of}\text{patient}=\frac{\$88,000}{10} \\ \text{Amortization}\text{of}\text{patient}=\$8,800 \end{gathered}$$