Question

The business is a limited liability company.

Jerry created a process for increasing the efficiency of his product. He incurred the following research and development operating expenses on the project during the year:

$5,000 hiring a scientist to teach him about the parts of his product.

$10,000 for market research investigating whether customers pay more for energy efficiency with his product

$20,000 of materials needed for developing the modification process.

In addition, the following operating costs were incurred from legal activities:

$2,500 of legal costs to register the patent for the modification

$4,000 of legal costs to successfully defend the patents rights, although an appeal against this judgement may be made by the other party.

Discuss the appropriate accounting treatment for the transactions and the journal entries.

Answer 1

As per the international financial reporting standards the expenses incurred on the research and development is treated as two types :-

All the expenses incurred in research phase is to be treated as expenses and transferred to profit and loss account

All the expenses incurred on development phase is to be treated as capital investment and capitalise those amounts to that particular intangible asset.

In the given case jerry created a process that increase in product efficiency . So it can be termed as intangible asset.

The treatment of each transaction is as follows :-

1. Expenses incurred for hiring of a scientist is treated as a consultancy services for the research of new process. This is expense incurred in the research phase will be treated as an expense and transfer to profit and loss account.

2. expenses incurred for market research in research phase of a new process is treated as an expense and transfer to profit and loss account.

3. Expenses incurred for developing of a modification in the developing phase of a new process is to be capitalised to the particular asset.

4. Expenses incurred for legal cost registering a patent in the development phase will be treated as capital expenditure for the developing of particular asset so we need to capitalise these expenses to the asset.

5. Expenses incurred for legal fast for defending the patent of our new process is to be treated as an development cost and to be capitalised to the particular asset.

These are all the treatment of the given transactions.

The journal entries for each transaction is as follows :-

1. Consultancy services a/c................dr $5000

To cash a/c $5000

(Being scientist was hired for consultancy and paid )

Profit and loss account...............dr $5000

To consultancy services. $5000

(Being expenses on consultancy services transfer to profit and loss account

2. Research expenses a/c..................dr $10000

To cash a/c $10000

(Being market research conducted regarding new process)

Profit and loss account ..............dr $10000

To research expenses a/c $10000

(Being expenses incurred on research are rransfer to profit and loss account)

3. Materials a/c........................dr $20000

To cash a/c $20000

(Being materials bought )

New process a/c....................dr $20000

To materials a/c $20000

(Being new process is developing, it has entered into developing phase we can capitalise those amount to new process)

4. Legal services a/c.............dr $2500

Cash a/c. $2500

(Being legal services availed)

New process a/c...................dr $2500

To legal services a/c $2500

(Being the legal expenses for registration of patent are incurred in developing phase we have capitalised to asset.)

5. Legal services a/c...........dr $4000

To cash a/c. $4000

(Being legal services consumed)

New process a/c.................dr $4000

To legal services a/c. $4000

(Being legal services are availed in development phase is capitalised to asset)

These are all the journal entries required to record all the given transactions.

These are all the treatment and journal entries required to solve the given question.

I hope, all the above mentioned information and explanations are useful and helpful to you.

Thank you.