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Salmon's Ltd's research and development section has come up with an idea for a project on using cane toad poison for medicinal purposes. The board of directors of Salmon Ltd believes that the project has promise and could lead to future profits for the firm. The project is, however, very expensive and needs approval from the board.

The company's chief financial officer, Mr Pink, has expressed concern that the profits of the firm have not been strong in recent years and he does not want to see research and development costs charged as expenses to the profit or loss. Mr Pink has proposed that Salmon Ltd should hire an outside firm, Tuna Ltd, to undertake the work and obtain the patent. Salmon Ltd could then acquire the patent from Tuna Ltd, with no effect on the profit or loss of Salmon Ltd.

Required:

Discuss whether Mr Pink's proposal is a sound idea, particularly in relation to the effect on the profit or loss of Salmon Ltd.

Accounting Basics, Accounting

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