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Research and development

During 2006, ABC Co purchased a building site for its proposed research and development laboratory at a cost of $60,000. Construction of the building was started in 2005. The building was completed on December 31, 2006, at a cost of $280,000 and was placed in service January 2, 2007. 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 salvage 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 2007 appears below.

Number Salaries & Other expenses
Completed projects with of projects employee (excluding
long-term benefits benefits charges)
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, Florence Nightingale Tool Company acquired a patent for manufacturing rights at a cost of $80,000. The patent was acquired on April 1, 2006, and has an economic life of 10 years.

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 2007?
B.) The company's balance sheet as of December 31, 2007.

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

Solution Summary

The solution explains how the research and development items would be presented in the income statement and the balance sheet