E12-16 (Accounting for R&D Costs)
Margaret Avery Company from time to time embarks on a research
program when a special project seems to offer possibilities. In 2009 the company expends $325,000 on a research project, but by the end of 2009 it is impossible to determine whether any benefit will be derived from it.
(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 2010, and a successful patent is obtained. The R&D costs to complete the project are $130,000. The administrative and legal expenses incurred in obtaining patent number 472-1001-84 in 2010 total $24,000. The patent has an expected useful life of 5 years. Record these costs in journal entry form. Also, record patent amortization (full year) in 2010.
(c) In 2011, the company successfully defends the patent in extended litigation at a cost of $47,200, thereby extending the patent life to December 31, 2018. What is the proper way to account for this cost? Also, record patent amortization (full year) in 2011.
(d) Additional engineering and consulting costs incurred in 2011 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.
P12-1 (Correct Intangible Asset Account)
Reichenbach Co., organized in 2009, has set up a single account for all intangible assets. The following summary discloses the debit entries that have been recorded during 2009 and 2010.
7/1/09 8-year franchise; expiration date 6/30/17 $ 48,000
10/1/09 Advance payment on laboratory space (2-year lease) 24,000
12/31/09 Net loss for 2009 including state incorporation fee,
$1,000, and related legal fees of organizing, $5,000 (all fees
incurred in 2009) 16,000
1/2/10 Patent purchased (10-year life) 84,000
3/1/10 Cost of developing a secret formula (indefinite life) 75,000
4/1/10 Goodwill purchased (indefinite life) 278,400
6/1/10 Legal fee for successful defense of patent purchased above 12,650
9/1/10 Research and development costs 160,000
P11-6 (Depletion, Timber, and Extraordinary Loss)
Conan O'Brien Logging and Lumber Company owns 3,000 acres of timberland on the north side of Mount Leno, which was purchased in 1998 at a cost of $550 per acre. In 2010, O'Brien began selectively logging this timber tract. In May of 2010, Mount Leno erupted, burying the timberland of O'Brien under a foot of ash. All of the timber on the O'Brien tract was
downed. In addition, the logging roads, built at a cost of $150,000, were destroyed, as well as the logging equipment, with a net book value of $300,000. At the time of the eruption, O'Brien had logged 20% of the estimated 500,000 board feet of timber. Prior to the eruption, O'Brien estimated the land to have a value of $200 per acre after the timber was harvested. O'Brien includes the logging roads in the depletion base. O'Brien estimates it will take 3 years to salvage the downed timber at a cost of $700,000. The timber can be sold for pulp wood at an estimated price of $3 per board foot. The value of the land is unknown, but must be considered nominal due to future uncertainties.
(a) Determine the depletion cost per board foot for the timber harvested prior to the eruption of Mount Leno.
(b) Prepare the journal entry to record the depletion prior to the eruption.
(c) If this tract represents approximately half of the timber holdings of O'Brien, determine the
amount of the extraordinary loss due to the eruption of Mount Leno for the year ended
December 31, 2010.
Your tutorial includes instructional comments, journal entries and schedules to illustrate what is needed in these types of problems. Each is on a separate tab.