91Ó°ÊÓ

Margaret Avery Company from time to time embarks on a research program when a special project seems to offer possibilities. In 2015, the company expends \(325,000 on a research project, but by the end of 2015, it is impossible to determine whether any benefit will be derived from it.

1. What account should be charged for the \)325,000, and how should it be shown in the financial statements?
2. The project is completed in 2016, and a successful patent is obtained. The R&D costs to complete the project are \(130,000 (\)36,000 of these costs were incurred after achieving economic viability). The administrative and legal expenses incurred in obtaining patent number 472-1001-84 in 2016 total \(24,000. The patent has an expected useful life of 5 years. Record these costs in the journal entry form. Also, record patent amortization (full year) in 2016.
3. In 2017, the company successfully defends the patent in extended litigation at a cost of \)47,200, thereby extending the patent life to December 31, 2024. What is the proper way to account for this cost? Also, record patent amortization (full year) in 2017.
4. Additional engineering and consulting costs incurred in 2017 required to advance the design of a new version of the product to the manufacturing stage total $60,000. These costs enhance the design of the product considerably, but it is highly uncertain if there will be a market for the new version of the product. Discuss the proper accounting treatment for this cost.

Step by step solution

01

Meaning of Amortization 

Amortization of intangible assets alludes to the strategy under which the cost of the distinctive intangible assetsof a company (assets that don't have any physical existence or cannot be felt and touched, i.e., trademark, goodwill, patents, etc.) are expensed over a particular period of time.

02

(a) Explaining the account that should be charged for the $325,000 and its presentation in financial statements 

The $325,000 is the research and development expenditure that should be accounted to the R&D Expense, and the overall cost of R&D should be individually stated in the notes to the financial statements if not separately declared in the income statement.

03

(b) Preparing journal entries

Date	Particulars	Debit ($)	Credit ($)
	Patents	36,000
	Research and Development Expense	94,000
	Cash		130,000
	(To record research and development costs)
	Patents	24,000
	Cash		24,000
	(To record legal and administrative costs incurred to obtain a patent)
	Amortization Expense	12,000
	Patents		12,000

Working Notes:

Calculating the number of patents:

$$\begin{gathered} \text{Patents}=\frac{\text{Patent}\text{cost}}{\text{Useful}\text{life}} \\ \text{Patents}=\frac{\$60,000}{5} \\ \text{Patents}=\$12,000 \end{gathered}$$

04

(c) Preparing journal entries

Date	Particulars	Debit ($)	Credit ($)
	Patents	47,200
	Cash		47,200
	(To record legal costs of successfully defending patent)

Note:Because the defense was successful and the patent's useful life was prolonged, the expense of defending the patent is capitalized.

Date	Particulars	Debit ($)	Credit ($)
	Amortization Expense	11,900
	Patents		11,900
	(To record one year’s amortization expense)

Working Notes:

Calculating the amount of amortization expense:

$\begin{array}{rcl}\text{Amortization}\text{expense}& =& \frac{\text{Carrying}\text{value}\text{after}1\text{year}+\text{Cost}\text{to}\text{defend}}{\text{Useful}\text{life}}\\ \text{Amortization}\text{expense}& =& \frac{\$48,000+\$47,200}{8}\\ \text{Amortization}\text{expense}& =& \frac{\$95,200}{8}\\ & =& \$11,900\end{array}$

05

(d) Explaining the proper accounting treatment for the cost

R&D costs are the additional engineering and consulting expenditures necessary to bring a product's concept to the production stage. It is R&D since it turns information into a strategy or design for a new product. Economic viability is not satisfied due to the uncertain market, and these expenditures should be expensed as incurred.

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