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Thomas Co research and development SFAS No. 2

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The Thomas Company is in the process of developing a revolutionary new product. A new division of the company was formed to develop, manufacture, and market this product. As of year-end (December 31, 2010), the product has not been manufactured for resale; however, a prototype unit was built and is in operation.

Throughout 2010 the division incurred certain costs. These costs include design and engineering studies, prototype manufacturing costs, administrative expenses (including salaries of administrative personnel), and market research costs. In addition, $500,000 in equipment (estimated useful life, 10 years) was purchased for use in developing and manufacturing the preproduction prototype and will be used to manufacture the product. Approximately $200,000 of this equipment was built specifically for the design and development of the product;
the remaining $300,000 of equipment will be used to manufacture the product once it is in commercial production.

a. Briefly indicate the practical and conceptual reasons for the conclusion reached by the FASB on accounting and reporting practices for R&D costs.

b. In accordance with SFAS No. 2, how should the various costs of Thomas just described be reported in the financial statements for the year ended December 31, 2010?

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Solution Summary

Practice and theoretical reasons are given and along with a reference.

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a. Briefly indicate the practical and conceptual reasons for the conclusion reached by the FASB on accounting and reporting practices for R&D costs.

Research and development costs are an intangible item. That is, they are not something that can be touched and seen. In fact, even identifying what costs should be called "research" and "development" is hard because the activities can be co-mingled with other business activities (such as co-occupying the same building as the production activity). This is the practical difficulty. Further, the future benefits of R&D activity is difficult to determine. This is the conceptual difficulty. Given how hard ...

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