RESEARCH AND DEVELOPMENT EXPENSE

Easy:

1. Mishiel Corporation incurred the following costs in 2013:

Acquisition of R&D equipment with a useful life of 4 years in R&D 800,000

projects
Cost of making minor modifications to an existing product 140,000
Advertising expense to introduce a new product 700,000
Engineering costs incurred to advance a product to full production 600,000
stage

What amount should Mishiel record as research & development expense in

2013?

a. 940,000
b. 1,300,000
c. 1,640,000
d. 800,000

2. In 2010, Julio Corporation incurred research and development costs as follows:

Materials and equipment 90,000

Personnel 120,000
Indirect costs 150,000
360,000

These costs relate to a product that will be marketed in 2011. It is estimated

that these costs will be recouped by December 31, 2013. The equipment has no
alternative future use. What is the amount of research and development costs
that should be expensed in 2010?

a. 0
b. 360,000
c. 270,000
d. 210,000

3. During 2013, Leah Co. incurred the following costs:

Testing in search for process alternatives 350,000

Costs of marketing research for new product 250,000
Modification of the formulation of a process 510,000
Research and development services performed by Beck Corp. for 425,000
Leah

In Leah's 2013 income statement, research and development expense should be

a. 510,000
b. 935,000
 c. 1,535,000
d. 1,285,000

Average:

4. David Company made amount of costs that will be expensed when incurred.

Cost to develop computer software for internal use in David's

general management information system 100,000
Costs of market research activities 75,000

What amount of these expenditures should David report in its 2013 income
statement as research and development expenses?

a. 175,000
b. 0
c. 75,000
d. 100,000

5. An entity is required to consider which of the following in developing

accounting policies for exploration and evaluation activities?

a. The definitions, recognition criteria, and measurement concepts for assets,

liabilities, income, and expenses in the Conceptual Framework.
b. The requirements and guidance in Standards and Interpretations dealing
with similar and related issues.
c. Recent pronouncements of standard-setting bodies, accounting literature
and accepted industry practices.
d. Whether the accounting policy results in information that is relevant and
reliable.

6. On December 31, 2012, Oracle Company had capitalized software costs of

P600,000 with an economic life of 4 years. Sales for 2013 were 10% of expected
total sales of the software. On December 31, 2013, the software had a net
realizable value of P480,000. On December 31, 2013, what amount should be
reported as net capitalized cost of computer software?

a. 432,000
b. 480,000
c. 540,000
d. 450,000

7. Which is not considered a research and development activity?

a. Laboratory research aimed at discovery of new knowledge

b. Conceptual formulation and design of possible product or process
c. Routine on-going efforts to refine, enrich or improve quality of existing
product
d. Design, construction and operation of a pilot plant
8. West Inc. made the following expenditures relating to Product Y:

1 Legal costs to file a patent on Product Y, P10,000. Production of the

finished product would not have been undertaken without the patent.
2 Special equipment to be used solely for development of Product Y -
P60,000. The equipment has no other use and has an estimated useful life
of four years.
3 Labor and material costs incurred in producing a prototype model -
P200,000.
4 Cost of testing the prototype- P80,000

What is the total amount of costs that will be expensed when incurred?

a. 350,000
b. 340,000
c. 295,000
d. 280,000

9. Russel Company incurred the following costs during the current year:

Modification to the formulation of a chemical product 1,350,000

Trouble-shooting in connection with the breakdowns during
commercial production 1,500,000
Design of tools, jigs, molds and dies involving new technology 1,700,000
Seasonal and other periodic design changes to existing products 1,850,000
Laboratory research aimed at discovery of new technology 2,150,000

What amount should be reported as research and development expense?

a. 5,200,000
b. 3,850,000
c. 3,350,000
d. 4,700,000

10.Which of the following statements is false regarding research and development

costs?

a. Development is the application of research findings or other knowledge to a

plan or design for the production of new product prior to the start of
commercial production.
b. Research is the original and planned investigation undertaken with the
prospect of gaining new scientific or technical knowledge and understanding
on a project.
c. If an entity cannot distinguish the research phase from the development
phase, the entity treats the R&D expenditure as if it were incurred in the
development phase only.
d. No intangible asset arising from research shall be recognized; expenditure
on research shall be recognized as an expense when it is incurred.
11.A newly set up dot-corn entity has recently completed one of its highly
publicized research and development projects. Which of the following
statements is accurate in relation to research and development costs?

a. Costs incurred during the "development phase" can be capitalized if criteria

such as technical feasibility of the project are met
b. Costs incurred during the "research phase" can be capitalized
c. Training costs of technicians used in research can be capitalized
d. Designing of jigs and tools qualify as research activities

12.On December 31, 2012, Bobbit Co. had capitalized costs for a new computer
software product with an economic life of 5 years. Sales for 2013 were 30% of
expected total sales of the software, which can be determined reliably. At
December 31, 2013, the software had a net realizable value equal to 90% of the
capitalized cost. What percentage of the original capitalized cost should be
reported as the net amount on Bobbit's December 31, 2013 statement of
financial position?

a. 80%
b. 70%
c. 72%
d. 90%

13.Which of the following is most likely included in research and development

expense in 2011?

a. The cost incurred in 2011 of research activities performed by another firm;

the project is expected to be completed in 2012
b. Depreciation in 2011 of the building used for research and development
c. The total cost of a building (useful life in 25 years, completed January 1,
2011) to be used in various research and development projects.
d. The cost incurred in 2011 to ensure quality control for existing production
processes

14.Which of the following is not a criterion which must be met before development
costs can be capitalized?

a. The entity has sufficient financial resources to complete the project.

b. The entity intends to complete the project and either use or sell the
intangible asset.
c. The project has achieved technical feasibility
d. The entity can reliably identify the research costs incurred to bring the
project to economic feasibility

15.Does PFRS 6 require an entity to recognize exploration and evaluation

expenditure as asset?

a. Yes, but only to the extent required by the entity's accounting policy for
recognizing exploration and evaluation asset
b. Yes, but only to the extent such expenditure is recoverable in future periods
 c. Yes, but only to the extent the technical feasibility and commercial viability
of extracting the associated mineral resource have been demonstrated
d. No, such expenditure is always expensed as incurred.

16.Steven Company purchased two machines for P1,800,000 each on January 1,

2013. The machines were put into use immediately. Machine A has a useful life
of 4 years and can be used only in one R&D project. Machine B will be used in
one R&D project for 3 years and then used by the production division for an
additional 3 years. What amount should be recognized as research and
development expense for 2013?

a. 2,400,000
b. 750,000
c. 2,100,000
d. 1,800,000

17.Cyril Company incurred the following costs in 2012:

Acquisition of R and D equipment with a useful life of 4 years in R 600,00

and D projects 0
Start-up costs incurred when opening a new plant 140,00
0
Advertising expense to introduce a new product 700,00
0
Engineering costs incurred to advance a product to full production 400,00
stage (economic viability not achieved) 0

What amount should be recorded as research development expense in 2012?

a. 1,000,000
b. 1,140,000
c. 740,000
d. 550,000

18.Jennifer Co. incurred research and development costs in 2013 as follows:

Materials used in research and development projects 450,000

Equipment acquired that will have alternate future uses in future 3,000,0
R&D projects 00
Depreciation for 2013 on above equipment 300,000
Personnel costs of persons involved in R&D projects 750,000
Consulting fees paid to outsiders for R&D projects 300,000
Indirect costs reasonably allocable to R&D project 225,000
5,025,0
00

The amount of research and development costs charged to Jennifer's 2013

income statement should be

a. 2,025,000
 b. 4,500,000
c. 1,500,000
d. 1,900,000

19.During 2013, Alejandro Company made the following expenditures relating to

plant machinery and equipment:

1 Renovation of a group of machines at a cost of P500,000 to secure greater

efficiency in production over their remaining five-year useful life. The
project was completed on December 31, 2013.
2 Continuing, frequent, and low cost repairs at a cost of P350,000.
3 A broken gear on a machine was replaced at a cost of P50,000.

What total amount should be charged to repairs and maintenance in 2013?

a. 850,000
b. 350,000
c. 900,000
d. 400,000

20.A newly set up dot com entity has engaged you as its financial advisor. The
entity has recently completed one of its highly publicized research and
development projects and seeks your advice on the accuracy of the following
statements made by one of its stakeholders. Which of the following statements
is accurate?

a. Designing the jigs and tools qualify as research activities

b. Costs incurred during the research phase can be capitalized
c. Training costs of technicians used in research can be capitalized
d. Costs incurred during the development phase can be capitalized if criteria
such as technical feasibility of the project being established are met

21.John Corporation incurred the following costs in 2013:

Acquisition of R&D equipment with a useful life of 4 years in R&D 600,000

projects
Start-up costs incurred when opening a new plant 140,000
Advertising expense to introduce a new product 700,000
Engineering costs incurred to advance a product to full production 400,000
stage

What amount should John record as research & development expense in 2013?

a. 1,140,000
b. 550,000
c. 1,000,000
d. 740,000

22.Which is not considered a research and development activity?

 a. Design, construction and operation of a pilot plant
b. Routine ongoing efforts to refine, enrich or improve quality of existing
product
c. Laboratory research aimed at discovery of new knowledge
d. Conceptual formulation and design of possible product or process

23.Cyrene Co. incurred the following costs during 2013:

Significant modification to the formulation of a chemical product 160,00

0
Trouble-shooting in connection with breakdowns during commercial 150,0
production 00
Cost of exploration of new formulas 200,00
0
Seasonal or other periodic design changes to existing products 185,00
0
Laboratory research aimed at discovery of new technology 225,00
0

In its income statement for the year ended December 31, 2013, Cyrene should
report research and development expense of

a. 920,000
b. 770,000
c. 585,000
d. 735,000

24.The proper accounting for the costs incurred in creating computer software
products that are to be sold, leased, or otherwise marketed to external parties,
is to

a. Charge research and development expense only if the computer hardware

has alternative future uses
b. Charge research and development expense when incurred until
technological feasibility has been established for the product
c. Capitalize all costs as incurred until a detailed program design or working
model is created
d. Capitalize all costs until the software is sold to external parties

25.Which of the following costs would be capitalized?

a. Engineering costs incurred to advance the product to the full production

stage
b. Salaries of research staff
c. Cost of research to determine whether a market for the product exists.
d. Acquisition cost of equipment to be used on current research project only

26.Which of the following is correct statement concerning research and

development costs?
 a. Notes to the financial statements must disclose total R&D costs charged to
expense in the period
b. All R & D costs, without exception, must be charged to expense when
incurred
c. Almost any treatment is acceptable for handling R&D costs
d. R&D can only be amortized over a life of 40 years or more

27.Which of the following would be considered research and development?

a. Construction of prototypes
b. Routine efforts to refine an existing product
c. Periodic alterations to existing production lines
d. Marketing research to promote a new product

28.Enrique Inc. incurred the following costs during the year ended December 31,
2013:

Laboratory research aimed at discovery of new knowledge 180,000

Costs of testing prototype and design modifications 45,000
Quality control during commercial production, including routine 270,000
testing of products
Construction of research facilities having an estimated useful life 360,000
of 6 years but no alternative future use

The total amount to be classified and expensed as research and development in

2013 is

a. 555,000
b. 585,000
c. 285,000
d. 855,000

Difficult:

29.The following costs were incurred by Gel Company during 2013:

Searching for applications of new research finding 57,000

Trouble shooting in connection with breakdowns during
commercial production 87,000
Adaptation of an existing capability to a particular requirement or
customer’s need as a part of continuing commercial activity 39,000
Engineering follow-through in an early phase of commercial 45,000
production
Radical modification of the formulation of a glassware product 78,000
Laboratory research aimed at discovery of new knowledge 204,000
Testing for evaluation of new products 72,000
Quality control during commercial production, including routine
testing of products 174,000
Materials consumed in research and development projects 177,000
 Consulting fees paid to outsiders for R&D projects 300,000
Personnel costs of persons involved in R&D projects 384,000
Indirect costs reasonably allocable to R&D projects 150,000
Materials purchased for future R&D projects 102,000
R&D costs reimbursable under a contract for a client 1,050,00
0
Design, cosntruction, and testing of prototypes and models 870,000
Routing on going efforts to refine, enrich, or otherwise improve
upon the qualities of an existing product 750,000
Total 4,539,00
0

What is the total amount to be classified and expensed as research and

development for 2013?

a. 2,394,000
b. 2,292,000
c. 2,220,000
d. 3,342,000

SOLUTION:

Searching for applications of new research findings 57,000

Radical modification of the formulation of glassware 78,000
Laboratory research aimed at new discovery 204,000
Testing for evaluation of new products 72,000
Materials consumed in R&D projects 177,000
Consulting fees to outsiders for R&D projects 300,000
Personnel costs of persons involved in R&D projects 384,000
Indirect costs reasonably allocable to R&D projects 150,000
Design and testing prototypes and models 870,000
Total 2,292,00
0

30.Raphael Company is engaged in a number of research and development

projects. Its accounting policy as regards to research and development is to
capitalize expenditure as far as allowed by PAS 38, Intangible Assets. At June
30, 2011, the following balances existed in the Company’s accounting records:

Project Development completed June 30, 2009. Total expenditure

A P200,000. Being amortized over 5 years on the straight line basis in
accordance with the Company’s standard policy. Balance at June
30, 2011: P120,000
Project A development project commenced July 1, 2009. Total expenditure
B in the years ended June 30, 2010 and June 30, 2011 totaled
P175,000. During the year ended June 30, 2012, it became clear
that a competitor had launched a superior product and the project
was abandoned. Further development expenditure in the year
ended June 30, 2012 amounted to P55,000
Project Development commenced October 1, 2010. Expenditure are as
 C follows:
Year ended June 30, 2011, P85,000; Year ended June 30, 2012,
P170,000
Project In addition, research project D commenced on July 1, 2011.
D Expenditure to date (all research)

Year ended June 30, 2012, P80,000

What amount should appear in the Company’s balance sheet for the year ended
June 30, 2012?

a. 355,000
b. 80,000
c. 255,000
d. 335,000

SOLUTION:

PL Balance Sheet
Project A 40,000 (200,000/5) 80,000 (120,000 - 40,000)
Project B 230,000 -
Project C - 255,000
Project D 80,000 -
350,000 335,000

31.Moses Company’s own research department has an on-going project to develop

a new production process. At the end of 2015, Moses had already spent a total
300,000, of which 270,000 was incurred before November 1, 2015. On
November 1, 2015, the company’s newly developed production process met the
criteria for recognition as an intangible asset.

During 2016, Moses incurred additional expenditure of 600,000. At the end of

2016, the recoverable amount of the intangible asset was estimated to be
570,000, including future cash flows to complete the process before it is
available for its intended use.

What is the total cost of the production process at December 31, 2016?

a. 630,000
b. 600,000
c. 870,000
d. 900,000

SOLUTION:

Expenditure incurred:

From November 1, 2015 - December 31, 2015 (300,000 - 270,000) 30,000

During 2016 600,000
Total as of December 31, 2016 630,000
32.A research and development activity for which the cost would be expensed as
incurred is

a. Design, construction and testing of preproduction prototypes and models

b. Periodic design changes to existing products
c. Adaptation of an existing capability to a particular requirement or customer
need
d. Quality control during commercial production

33.Raphael Company is engaged in a number of research and development

projects. Its accounting policy as regards to research and development is to
capitalize expenditure as far as allowed by PAS 38, Intangible Assets. At June
30, 2011, the following balances existed in the Company’s accounting records:

Project Development completed June 30, 2009. Total expenditure P200,000.

A Being amortized over 5 years on the straight line basis in
accordance with the Company’s standard policy. Balance at June 30,
2011: P120,000
Project A development project commenced July 1, 2009. Total expenditure
B in the years ended June 30, 2010 and June 30, 2011 totaled
P175,000. During the year ended June 30, 2012, it became clear
that a competitor had launched a superior product and the project
was abandoned. Further development expenditure in the year
ended June 30, 2012 amounted to P55,000
Project Development commenced October 1, 2010. Expenditure are as
C follows:
Year ended June 30, 2011, P85,000; Year ended June 30, 2012,
P170,000
Project In addition, research project D commenced on July 1, 2011.
D Expenditure to date (all research)

Year ended June 30, 2012, P80,000

What amount should appear in the Company’s income statement for the year
ended June 30, 2012?

a. 270,000
b. 230,000
c. 350,000
d. 120,000

SOLUTION:

PL Balance Sheet
Project A 40,000 (200,000/5) 80,000 (120,000 - 40,000)
Project B 230,000 -
Project C - 255,000
Project D 80,000 -
350,000 335,000
34.Neil Company develops for small business and home computer markets. Most
the company’s computer programmers are involved in developmental work
designed to produce software that will perform fairly specific tasks in user-
friendly manner. Extensive testing of the working model is performed before it
is released to production for preparation of masters and further testing. This
careful preparation has resulted to the production of several computer software
packages that have been very successful in the marketplace.

Neil incurred the following costs during 2016:

Salaries and wages of programmers doing research 705,000

Expenses related to projects prior to establishment of technological 235,200
feasibility
Expenses related to projects after technological feasibility has been
established but before software is available for commercial 148,500
production
Amortization of capitalized software developments costs from
current and prior years 80,250
Costs to produce and prepare software for sale 168,900

Additional data for 2016:

Sales of products for the year 1,545,00

0
Beginning inventory 426,000
Portion of goods available for sale sold during year 60%

Income tax rate is 35%

What is Neil’s net income for 2016?

a. 226,336
b. 199,710
c. 129,812
d. 181,704

SOLUTION:

Sales 1,545,00
0
Cost of goods sold:
Beginning inventory 426,000
Software production costs (including amortization of
capitalized software costs) (168,900 + 80,250) 249,150
Goods available for sale 675,150
Ending inventory (40% x 675,150) 270,060 405,090
Gross income 1,139,91
0
Expenses:
 Salaries and wages of programmers 705,000
Research-related expenses 235,200 940,200
Income before income tax 199,710
Income tax (35%) 69,898
Net income 129,812

35.During 2010, Nate Company purchased a building site for its proposed research
and development laboratory at a cost of 1,200,000. Construction of the building
was started in 2010. The building was completed on December 31, 2015, at a
cost of 5,600,000 and was placed in service on January 2, 2016. The estimated
useful life of the building for depreciation purposes was 20 years; The straight-
line method of depreciation was to be employed and there was no estimated
salvage value.

Management estimates that about 50% of the projects of the research and
development group will result in long-term benefits (i.,e.,at least 10 years) to
the corporation. However, Nate fails to demonstrate how such projects will
generate probable future economic benefits. The remaining projects either
benefit the current period or are abandoned before completion. A summary of
the number of projects and the direct costs incurred in conjunction with the
research and development activities for 2016 appears below.

Upon recommendation of the research and development group, Nate Company

acquired a patent for manufacturing rights at a cost of 1,600,000. The patent
was acquired on April 1, 2015, and has an economic life of 10 years.

Number Salaries Other Expenses

of and (excluding
Projects Employe Building
e Depreciation
Benefits Charges)
Completed projects with long-term 30 1,800,0 1,000,000
benefits 00
Abandoned projects or projects that
benefit the current period 20 1,300,00 300,000
0
Project in process - results 10 800,000 240,000
indeterminate
Total 60 3,900,00 1,540,000
0

The total research and development expenses for 2016 should be

a. 5,440,000
b. 5,720,000
c. 2,920,000
d. 5,880,000

SOLUTION:
Salaries and employee benefits 3,900,000
Depreciation - building (5,600,000/20 years) 280,000
Other expenses 1,540,000
Total research and development expenses 5,720,000