Problem -
Innovator Ltd incurred expenditure researching and developing a cure for a common disease found in turnips. At the end of 2013 management determined that the research and development project was unlikely to succeed because trials of the prototype had been unsuccessful. During 2014 a breakthrough in agricultural science improved chances of the product succeeding and development resumed. The project was completed in 2014. At the end of 2014 costs incurred on the project were expected to be recoverable. Innovator expects that 10 per cent of the project revenue will be received in 2015, 20 per cent in 2016, 30 per cent in 2017, 30 per cent in 2018 and 10 per cent in 2019. After five years the product will be at the end of its useful life because the disease found in turnips will have been eradicated. Costs incurred were as follows:
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Research ($000)
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Development ($000)
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2013
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40 000
|
10 000
|
|
2014
|
12 000
|
60 000
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REQUIRED -
(a) How much research expenditure and development expenditure should be recognized as an expense in 2013?
$50 000 should be recognised as an expense. All $40 000 of the research expenditure must be expensed. The development expenditure of $10 000 must also be expensed in 2010 because at that time the project was not expected to generate future economic benefits.
(b) How much research and development expenditure should be recognized as an expense in 2014?
$12 000 shall be treated as an expense as all research expenditure must be expensed. $60 000 in development expenditure can be capitalised in 2011. It will then start to be amortised from 2012.
(c) State how much expenditure should be carried forward (deferred) and reported in the statement of financial position at the end of 2013 and 2014.
2010: $nil; 2011: $60 000
(d) Prepare journal entries for the amortization of deferred costs in 2015 and 2016, assuming that actual revenues are as expected. State the amount of deferred expenditure carried forward in the statement of financial position in relation to the deferred costs.
2012 Dr Development Expense $6 000 Cr Accumulated Amort. Deferred Development Costs$6 000 Amortisation of deferred developments costs-turnip project 2013 Dr Development Expense $12 000 Cr Accumulated Amort. Deferred Development Costs$12 000 Amortisation of deferred developments costs-turnip project 2012 $ 2013 $ Deferred Development Cost 60 00060 000 Accumulated Amortisation 6 00018 000Carrying Amount 54 00042 000
(e) Assume that after charging amortization based on sales revenue at the end of 2014 the discounted net cash flows expected to be generated from the deferred expenditure were estimated as $15 000. Prepare any journal entries required to account for this information.