Clonal, Inc., a biotechnology company, developed and patented a diagnostic product called Trouver. Clonal purchased some research equipment to be used exclusively for Trouver and subsequent research projects. Clonal defeated a legal challenge to its Trouver patent, and began production and marketing operations for the project.
Corporate headquarters' costs were allocated to Clonal's research division as a percentage of the division's salaries.
Required:
1. How should the equipment purchased for Trouver be reported in Clonal's income statements and statements of financial position?
2. a. Describe the matching principle.
b. Describe the accounting treatment of research and development costs and consider whether this is consistent with the matching principle. What is the justification for the accounting treatment of research and development costs?
3. How should corporate headquarters' costs allocated to the research division be classified in Clonal's income statements? Why?
4. How should the legal expenses incurred in defending Trouver's patent be reported in Clonal's financial statements?