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    Accounting for R & D Costs

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    16. (Accounting for R & D Costs) Leontyne Price Company from time to time embarks
    on a research program when a special project seems to offer possibilities. In 2003 the
    company expends $325,000 on a research project, but by the end of 2003 it is impossible
    to determine whether any benefit will be derived from it.
    Instructions
    a. What account should be charged for the $325,000, and how should it be shown
    in the financial statements?

    b. The project is completed in 2004, and a successful patent is obtained. The R & D
    costs to complete the project are $110,000. The administrative and legal expenses
    incurred in obtaining patent number 472-1001-84 in 2004 total $16,000. The patent
    has an expected useful life of 5 years. Record these costs in journal entry form.
    Also, record patent amortization (full year) in 2004.
    c. In 2005, the company successfully defends the patent in extended litigation at a
    cost of $47,200, thereby extending the patent life to December 31, 2012. What is
    the proper way to account for this cost? Also, record patent amortization (full
    year) in 2005.
    d. Additional engineering and consulting costs incurred in 2005 required to advance
    the design of a product to the manufacturing stage total $60,000. These costs
    enhance the design of the product considerably. Discuss the proper accounting
    treatment for this cost.

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    Solution Preview

    a. What account should be charged for the $325,000, and how should it be shown
    in the financial statements?

    In accordance with FASB Statement No. 2, the $325,000 is a research and development
    cost that should be charged to R & D Expense and, if not separately disclosed in the
    income statement, the total cost of R & D should be separately disclosed in the notes to
    the financial statements.

    b. The project is completed in 2004, and a successful patent is obtained. The R & D
    costs to complete the project are $110,000. The administrative and legal expenses
    incurred in obtaining patent number ...

    Solution Summary

    The solution explains the accounting for R&D costs for Leontyne Price Company

    $2.19

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