(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.
