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Chapter 12: Q2ISTQ (page 610)

Research and development costs are:

(a) expensed under GAAP.

(b) expensed under IFRS.

(c) expensed under both GAAP and IFRS.

(d) None of the above.

Short Answer

Expert verified

Expensed under GAAP

Step by step solution

01

Meaning of GAAP

GAAP stands for "generally accepted accounting principles," a collection of accounting principles, methods, and rulesthat organizations use to create or make financial statements for a given period. This increases the company's monetary information communication's comprehensibility.

02

Explaining the correct option

Since the future economic value is uncertain, research and development costs can be recorded as expenses as they are incurred under GAAP.

Therefore, the correct option is (a), expensed under GAAP.

03

Explaining the incorrect option

Option b) Research expenses are expensed utilizing IFRS (IAS 382), comparable to US GAAP. Opposite to US GAAP, IFRS contains a broad-based direction that compels enterprises to perceive development costs, including internal costs, when certain conditions are met.

Option c) Development expenditures are typically included in research and development, which are frequently categorized under the account heading of intangible assets under both IFRS and GAAP.

Option d) Option a is the correct option for the question. So, option (d) none of the above is not possible.

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Most popular questions from this chapter

Question: Michek Company loans Sarasota Company \(2,000,000 at 6% for 3 years on January 1, 2017. Michek intends to hold this loan to maturity. The fair value of the loan at the end of each reporting period is as follows.

December 31, 2017 \)2,050,000

December 31, 2018 2,020,000

December 31, 2019 2,000,000

Prepare the journal entry(ies) at December 31, 2017, and December 31, 2019, for Michek related to these bonds, assuming (a) itdoes not use the fair value option, and (b) it uses the fair value option. Interest is paid on January 1.

The following is selected information for Alatorre Company.

1. Alatorre purchased a patent from Vania Co. for \(1,000,000 on January 1, 2015. The patent is being amortized over its remaining legal life of 10 years, expiring on January 1, 2025. During 2017, Alatorre determined that the economic benefits of the patent would not last longer than 6 years from the date of acquisition. What amount should be reported in the balance sheet for the patent, net of accumulated amortization, at December 31, 2017?

2. Alatorre bought a franchise from Alexander Co. on January 1, 2016, for \)400,000. The carrying amount of the franchise on Alexander鈥檚 books on January 1, 2016, was \(500,000. The franchise agreement had an estimated useful life of 30 years. Because Alatorre must enter a competitive bidding at the end of 2018, it is unlikely that the franchise will be retained beyond 2025. What amount should be amortized for the year ended December 31, 2017?

3. On January 1, 2017, Alatorre incurred organization costs of \)275,000. What amount of organization expense should be reported in 2017?

4. Alatorre purchased the license for distribution of a popular consumer product on January 1, 2017, for $150,000. It is expected that this product will generate cash flows for an indefinite period of time. The license has an initial term of 5 years but by paying a nominal fee, Alatorre can renew the license indefinitely for successive 5-year terms. What amount should be amortized for the year ended December 31, 2017?

Instructions:

Answer the questions asked about each of the factual situations.

Question: Indicate whether the following items are capitalized or expensed in the current year. (a) Purchase cost of a patent from a competitor. (c) Organizational costs. (b) Research and development costs. (d) Costs incurred internally to create goodwill.

Kenoly Corporation owns a patent that has a carrying amount of \(300,000. Kenoly expects future net cash flows from this patent to total \)210,000. The fair value of the patent is $110,000. Prepare Kenoly鈥檚 journal entry, if necessary, to record the loss on impairment.

Waters Corporation purchased Johnson Company 3 years ago and at that time recorded goodwill of \(400,000. The Johnson Division鈥檚 net assets, including the goodwill, have a carrying amount of \)800,000. The recoverable amount of the division is estimated to be $1,000,000. Prepare Waters鈥� journal entry, if necessary, to record an impairment of the goodwill.
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