Purpose: This exercise will give you practice in identifying activities that constitute R & D activities.
Listed below are four independent situations involving research and development costs:
1. During 2014 Bebe Co. incurred the following costs:
Research and development services performed by Way Co. for Bebe $ 325,000 Testing for evaluation of new products 300,000
Laboratory research aimed at discovery of new knowledge 375,000 Research and development services performed by Bebe for Elway Co. 220,000
How much should Bebe report as research and development expense for the year ended December 31, 2014?
2. Holly Corp. incurred the following costs during the year ended December 31, 2014: Design, construction, & testing of preproduction prototypes & models $ 220,000 Routine, on-going efforts to refine, enrich, or otherwise improve upon the qualities of an existing product 250,000 Quality control during commercial production including routine
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testing of products
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300,000
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Laboratory research aimed at discovery of new knowledge
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360,000
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Conceptual formulation and design of possible product alternatives
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100,000
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What is the total amount to be classified and expensed as research and development for 2014?
3. Polanski Company incurred costs in 2014 as follows:
Equipment acquired for use in various R & D projects (current and future) $ 890,000
Depreciation on the equipment above 135,000
Materials used in R & D 300,000
Compensation costs of personnel in R & D 400,000
Outside consulting fees for R & D work 150,000
Indirect costs appropriately allocated to R & D 260,000
What is the total amount of research and development expense that should be reported in Polanski's 2014 income statement?
4. Liverpool Inc. incurred the following costs during the year ended December 31, 2014:
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Laboratory research aimed at discovery of new knowledge
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$ 175,000
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Routine design of tools, jigs, molds, and dies
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60,000
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Radical modification to the formulation of a chemical product
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125,000
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Research and development costs reimbursable under a contract to perform R & D for Johnathon King, Inc.
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350,000
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Testing for evaluation of new products
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275,000
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What is the total amount to be classified and expensed as research and development for 2014?