Question

Question: Which of the following activities should be expensed currently as R&D costs?

1. Testing in search for or evaluation of product or process alternatives.
2. Engineering follow-through in an early phase of commercial production.
3. Legal work in connection with patent applications or litigation, and the sale or licensing of patents.

Short answer

Answer

1. The expense is an R&D cost.
2. The expense is an R&D cost.
3. Expenses should be capitalized.

Step-by-step solution

Meaning of R&D

R&D is the process through which a corporation seeks out new information to produce new technologies, goods, services, or systems that it can use or sell. Adding to the company's bottom line is frequently the aim

(a) Explaining R&D expenses

Any expensesubject to research for products or processes that enhance design should be treated as an R&D expense. So, research in the evaluation of products should be charged as an R&D expense.

(b) Explaining R&D and Engineering Follow-through as activities

R&D helps determine the new knowledge that helps in the progress of the production cycle. Engineering follow-through helps deal with new technologies in the early stages of commercial production, and so the expenditure also should be seen as an R&D expense.

(c) Explaining capitalized expenses

All the expenses related to the patient application or litigation and the sale or licensing of patents should be capitalized as patent and license expenses and amortized. These are not subject to R&D and should be treated separately as capitalized expenses.