The r d costs would then be allocated to those

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Unformatted text preview: future benefits. The company will not know whether or not a particular R & D expenditure will provide a future benefit until some time in the future. Due to the uncertainty of projecting the usefulness of a given R & D 18 expenditure, the FASB, in Statement of Financial Accounting Standards No. 2, "Accounting for Research and Development Costs," requires companies to expense R & D costs in the year in which they are incurred. E9–19 f. Concluded Engaging in research and development activities can lead companies to develop new products or processes that will provide them with future benefits. In such cases, the R & D costs should, theoretically, be capitalized. The R & D costs would then be allocated to those periods in which the costs help generate a benefit. From a practical standpoint, however, this matching of costs with the associated benefits is not readily possible. For example, consider a company that spends $10,000,000 trying to develop a more efficient manufacturing process. The company's attempts end in failure, but the company acquires some new technology from its R & D activities that permit it to develop a revolutionary new product ten years later. In this case, it is clear that the $10,000,000 eventually provided a future benefit. But this information is available only with hindsight. At the time the $10,000,000 was expended, all the company knew was that the R & D project was a failure. So, while capitalizing R & D costs and then amortizing the costs over their useful lives is theoretically superior to immediately expensing the R & D costs, immediately expensing R & D costs is extremely practical and lessens a manager's ability to manipulate the financial statements. E9–20 a. (1 ) Southern Robotics should report the costs incurred in acquiring the patent as an asset. Therefore, the $50,000 of legal and filing fees should be capitalized as an asset in 2011. Since it is company policy not to amortize intangible assets in the year of acquisition, the company would report the entire $50,000 as an asset as of December 31, 2011. (2 ) Since Southern Robotics successfully defended its patent, the patent is still expected to provide a future benefit to the company. Hence, the company should continue to carry the patent on its books as an asset. The amount it should report for the patent as of December 31, 2012 should be the cost of acquiring and defending the patent less the portion of these costs that have been amortized. Therefore, Southern Robotics should report $200,000 on its balance sheet (i.e., $50,000 in legal and filing fees incurred in 2011 + $200,000 in legal fees incurred in 2012 to defend the patent – $50,000 in amortization). (3 ) Amortization Expense (E, –SE) Patent (–A) Amortized patent. 50,000 50,000 b. (1 ) Since the lawsuit did not take place until 2012, the patent still had value to Southern Robotics as of December 31, 2011. Therefore, the company should still report the patent at $50,000 on its books as of December 31, 2011. However, if Southern Robotics was aware of the lawsuit as of December 31, 2011, it might want to disclose the lawsuit and the potential effect on the company's financial statements in a footnote as a contingency. (2 ) Since Southern Robotics was unsuccessful in defending its patent, the company no longer has the exclusive right to use or market its robotics arm. Therefore, the patent no longer provides the 19 company with any future benefits. Since the patent no longer provides any future benefits, it should be written off in 2012. (3 ) Loss on Patent (Lo, –SE) 50,000 Legal Expenses (E, –SE) 200,000 Patent (–A) 50,000 Cash (–A) 200,000 Incurred legal fees for patent defense and wrote off patent. E9–21 a. The journal entry for the acquisition can be derived from the information provided and appears below: Assets (+A) (at fair market value) Goodwill (+A) 3.8 Liabilities (+L) 1.1 Cash (­A) 7.8 5.1 Goodwill represents the excess of the purchase price above the fair market value of the assets purchased. b. Assets increased by a net $1.1 billion ($5.1 + 3.8 – 7.8) and liabilities increased by $1.1 billion. E9–22 a. b. c. 20 Under US GAAP, long­lived assets must be carried at original cost less accumulated depreciation (amortization); if the market value of the asset permanently falls below the balance sheet carrying value, an impairment charge must be recorded, and cannot be reversed in later periods if the value of the asset recovers. Under IFRS, companies can either follow the US GAAP method, or they can periodically revalue their long­lived assets to fair market value – recognizing not only impairments, but also increases and recoveries of asset values. EADS has accounted for this asset according to U.S. GAAP methods. If EADS were to carry the asset at its Fair Market Value (using the IFRS approach), the company would increase the value of the asset by 1 million euros and would record a gain on its income statement of the same amount. PROBLEMS P9–1 a. Stonebrecker should capitalize all costs that it...
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This homework help was uploaded on 03/03/2014 for the course ACCT 5053 taught by Professor Staff during the Fall '08 term at Oklahoma State.

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