RESEARCH AND DEVELOPMENT
➢ All research and development costs are charged to expense in
the period incurred.
R&D costs entail a high degree of uncertainty of future
benefits.
It is difficult to match R&D costs with future revenues.
➢ Research is planned search or critical investigation aimed at
discovery of new knowledge.
T10-20
10-38 Intermediate Accounting, 8/e
RESEARCH AND DEVELOPMENT
(continued)
| ___________________________________________ | _____________________________________________|
| | |
Start of Start of Sale of
R&D Commercial Product
Activity Production or Process
Examples of R&D Costs: | Examples of Non-R&D Costs:
|
• Laboratory research aimed at | • Engineering follow-through
discovery of new knowledge | in an early phase of commercial
| production
Illustration 10-19
RESEARCH AND DEVELOPMENT COSTS
The Askew Company made the following cash expenditures during 2016
related to the development of a new industrial plastic:
R&D salaries and wages $10,000,000
The various expenditures would be recorded as follows:
R&D expense …………………………………………. 14,200,000
($10,000,000 + 3,000,000 + 1,200,000)
Cash ……………………………………………………. 14,200,000
Illustration 10-20
T10-21
10-40 Intermediate Accounting, 8/e
COMPUTER SOFTWARE DEVELOPMENT COSTS
➢ GAAP requires the capitalization of software development
costs incurred after technological feasibility is established.
➢ Technological feasibility is established “when the enterprise
has completed all planning, designing, coding, and testing
Costs expensed as Costs
R&D Capitalized Costs not R&D
| __________________ | ___________________ | ___________________ |
Illustration 10-21
➢ The periodic amortization percentage for software
development costs is the greater of (1) the ratio of current
T10-22
COMPUTER SOFTWARE DEVELOPMENT COSTS
(continued)
The Astro Corporation develops computer software graphics programs for
sale. A new development project begun in 2015 reached technological
feasibility at the end of June 2016, and the product was available for
release to customers early in 2017. Development costs incurred in 2016
prior to June 30 were $1,200,000 and costs incurred from June 30 to the
1. Percentage-of-revenue method:
2. Straight-line method:
Illustration 10-22
T10-22 (continued)
10-42 Intermediate Accounting, 8/e
INTERNATIONAL FINANCIAL REPORTING STANDARDS
Research and Development Expenditures. Other than software
development costs incurred after technological feasibility has been established, U.S.
GAAP requires all research and development expenditures to be expensed in the
period incurred. IAS No. 38 draws a distinction between research activities and
Software, research and development and other intangible assets (in part)
Expenditures on research activities, undertaken with the prospect of gaining
new technical knowledge and understanding, are recognized in the income
statement when incurred.
Development activities involve a plan or design for the production of new
or substantially improved products and processes. Development
expenditures are capitalized only if development costs can be measured
useful life.
INTERNATIONAL FINANCIAL REPORTING STANDARDS
Software Development Costs. The percentage we use to amortize
computer software development costs under U.S. GAAP is the
T10-24
10-44 Intermediate Accounting, 8/e
OIL AND GAS ACCOUNTING
➢ Two generally accepted methods to account for oil and gas
exploration costs are:
The successful efforts method requires that exploration costs
that are known not to have resulted in the discovery of oil or gas
(sometimes referred to as dry holes) be included as expenses in
the period the expenditures are made.
The full-cost method allows costs incurred in searching for oil
and gas within a large geographical area to be capitalized as
assets and expensed in the future as oil and gas from the
successful wells are removed from that area.
The Shannon Oil Company incurred $2,000,000 in exploration costs for
each of 10 oil wells drilled in 2016 in West Texas. Eight of the 10 wells
were dry holes.
Illustration 10A-1
T10-25
Suggestions for Class Activities
1. Guest Speaker
The assigning of fair value to assets acquired in an acquisition is an interesting topic for students.
The accounting issues are interesting, as are the valuation issues.
Through your contacts at local CPA firms, preferably one of the Big 4 firms, arrange for a set of
speakers to address these issues. If possible, organize a visit of one manager/partner in the audit area
and one in the valuation services area. The auditor can speak about the accounting issues and can
provide an update as to the FASB/SEC activity in this area. The valuation services person can go
through the valuation techniques they use to assign values to all of the items acquired in a purchase.
Students are very interested in these topics, particularly the valuation issues. It is a wonderful
opportunity to open their minds to the many different types of services accounting firms provide to
their clients. It is interesting to note that the Big 4 firms have ceased providing acquisition valuation
services to their firm’s audit clients. Due to the independence issue, Sarbanes–Oxley, and SEC
scrutiny, they now provide these services only to audit clients of other accounting firms.
2. Research Activity
At the end of its 2013 fiscal year, Toro Company, the lawn mower company, reported approximately
$185 million in property, plant, and equipment and another $120 million in intangible assets in its
balance sheet.
Suggestions:
Have the class access Toro’s financial statements for the fiscal year ended October 31, 2013,
using Edgar at: www.sec.gov. Ask them to answer the following questions:
1. What types of assets does Toro include under the property, plant, and equipment
classification?
2. What types of assets does Toro include as intangibles?
3. What was the company’s fixed-asset turnover ratio for 2013?
4. How much did Toro report as research & development expense in 2013?
3. PetSmart Analysis
10-46 Intermediate Accounting, 8/e
1. Compare the net amount of property and equipment with that in the 2014 financial statements
included in Appendix B of the text. What is happening to the company’s asset base? Is the
company expanding its operations?
2. Compute the fixed-asset turnover ratio for the current year and compare your result with the
2014 ratio. Has the ratio changed significantly, and if so, what are the possible implications?
4. Professional Skills Development Activities
The following are suggested assignments from the end–of-chapter material that will help your
students develop their communication, research, analysis and judgment skills.
Communication Skills. In addition to Communication Case 10-11, Judgment Case 10-8 can be
adapted to ask students to write a memo from a junior accountant to a controller answering
each of the questions. Communication Case 10-10 and Ethics Case 10–12 do well as group
Research Skills. In their careers, our graduates will be required to locate and extract relevant
information from available resource material to determine the correct accounting practice,
perhaps identifying the appropriate authoritative literature to support a decision. Research
Case 10-2 and Exercises 10-22 and 10-23 provide excellent opportunities to help students
develop this skill. In addition, Judgment Case 10-15 can be adapted to require students to
research the authoritative literature on accounting for computer software development costs.
Analysis Skills. The “Broaden Your Perspective” section includes Analysis Cases that direct
students to gather, assemble, organize, process, or interpret data to provide options for making
business and investment decisions. In addition to Analysis Cases 10-14 and 10-17, Real World
Case 10-16 also provides opportunities to develop and sharpen analytical skills.
Judgment Skills. The “Broaden Your Perspective” section includes Judgment Cases that require
students to critically analyze issues to apply concepts learned to business situations in order to
evaluate options for decision-making and provide an appropriate conclusion. In addition to
Judgment Cases 10-1, 10-3, 10-4, 10-7, 10-8, 10-9, and 10-15, Communication Case 10–11
also requires students to exercise judgment.
CPA Simulation. Students can test their knowledge of the concepts discussed in this chapter and
5. Ethical Dilemma
The chapter contains the following ethical dilemma:
ETHICAL DILEMMA
Grandma’s Cookie Company purchased a factory building. The company Controller, Don Nelson,
is in the process of allocating the lump-sum purchase price between land and building. Don
suggests to the company’s chief financial officer, Judith Prince, that they fudge a little by allocating
a disproportionately higher share of the price to land. Don reasons that this will reduce
depreciation expense, boost income, increase their profit-sharing bonus and, hopefully, increase
the price of the company’s stock. Judith has some reservations about this because the higher
reported income will also cause income taxes to be higher than they would have been if a correct
allocation of the purchase price is made.
What are the ethical issues? What stakeholders’ interests are in conflict?
You may wish to discuss this in class. If so, discussion should include these elements.
Step 1—The Facts:
Grandma’s Cookie Company has purchased a factory building. The controller, Don Nelson,
suggests that the company allocate a higher share of the purchase price to land, permitting lower
depreciation, higher net income, and higher profit-sharing bonuses in future years. The CFO, Judith
Step 2—The Ethical Issue and the Stakeholders:
The ethical issue or dilemma is whether the controller’s obligation to his employer to increase net
income is greater than his obligation to provide information that is not misleading to users of the
financial statements, including the tax authorities.
Stakeholders include Don Nelson, controller, Judith Prince, CFO, other recipients of the profit–
sharing plan, government entities, current and future creditors, and current and future investors.
Step 3—Values:
Values include competence, honesty, integrity, objectivity, loyalty to the company, loyalty to
other managers, and responsibility to users of financial statements.
Step 4—Alternatives:
1. Record the land at a proportionately higher value than the building.
Step 5—Evaluation of Alternatives in Terms of Values:
10-48 Intermediate Accounting, 8/e
1. Alternative 1 illustrates loyalty to placing the Cookie Company in a favorable financial
position.
2. Alternative 2 reflects values of competence, honesty, integrity, objectivity, and responsibility
to users of the financial statements.
Step 6—Consequences:
Alternative 1
Positive consequences: Future net income will be increased, profit-sharing plan members will
benefit, the price of the company’s stock will increase, investors will experience higher returns on
their investments, and taxing authorities will receive more tax revenue.
Alternative 2
Positive consequences: Users of financial statements, including taxing authorities, would receive
net income figures according to GAAP. The controller and CFO would maintain their integrity. The
Step 7—Decision:
Student(s) must decide their course of action.
Assignment Chart
Learning Est. time
Questions Objective(s) Topic (min.)
10-1
1
Long-lived assets; tangible versus intangible
5
10-2
1
Cost of long-lived assets
5
10-3
1
Cost of a natural resource
5
10-4
1,8
Intangible assets; purchased versus developed
5
10-5
1
Goodwill
5
10-6
2
Lump-sum purchase
5
10-7
3
Acquisition in exchange for a note
5
10-8
4
Acquisition in exchange for equity securities
5
10-9
4
Acquisition through donation
5
10-10
6
Dispositions
5
10-11
6
Nonmonetary exchange
5
10-12
6
Nonmonetary exchange
5
10-13
7
Interest capitalization
5
10-14
7
Interest capitalization
5
10-15
7
Interest capitalization
5
10-16
8
Research and development
5
10-17
8
Research and development
5
10-18
8
Software development costs
5
10-19
8
Developed technology versus in-process R&D
5
10-20
9
IFRS; government grants
5
10-21
9
IFRS; research and development
5
10-22
9
IFRS; software development costs
5
10-23
A
Oil and gas accounting [Based on Appendix]
5
Brief Learning Est. time
Exercises Objective(s) Topic (min.)
10-1
1
Acquisition cost; machine
5
10-2
1
Acquisition cost; land and building
5
10-3
2
Lump-sum acquisition
10
10-4
1
Cost of a natural resource
10
10-5
1
Asset retirement obligation
10
10-6
1
Goodwill
5
10-7
3
Acquisition cost; noninterest-bearing note
10
10-8
4
Acquisition cost; issuance of equity securities
5
10-9
5
Fixed-asset turnover ratio; solving for unknown
5
10-10
6
Disposal of asset
5
10-11
6
Nonmonetary exchange
10
10-12
6
Nonmonetary exchange
10
10-13
6
Nonmonetary exchange
10
10-14
7
Interest capitalization
10
10-15
7
Interest capitalization
10
10-16
8
Research and development
10
10-50 Intermediate Accounting, 8/e
Learning Est. time
Exercises Objective(s) Topic (min.)
10-1
1
Acquisition costs; land and building
10
10-2
1
Acquisition cost; equipment
10
10-3
1,2
Acquisition costs; lump-sum acquisition
20
10-4
1
Cost of a natural resource
15
10-5
1
Intangibles
10
10-6
1
Goodwill
10
10-7
1
Goodwill
15
10-8
2
Lump-sum acquisition
10
10-9
3
Acquisition cost; noninterest-bearing note
15
10-10
1,3
Acquisition costs; noninterest-bearing note
20
10-11
4,9
IFRS; acquisition by issuance of equity securities
and donation
10
10-12
9
IFRS; acquisition by donation; government grant
10
10-13
5
Fixed-asset turnover ratio; Nvidia
10
10-14
6
Disposal of asset
10
10-15
6
Disposal of property, plant, and equipment and
intangible assets
10
10-16
6
Nonmonetary exchange
10
10-17
6
Nonmonetary exchange
10
10-18
6
Nonmonetary exchange
10
10-19
6
Nonmonetary exchange
10
10-20
6
Nonmonetary exchange
15
10-21
1,3,4,6
Acquisition cost; multiple methods
25
10-22
6
FASB codification research
20
10-23
1,6,7,8
FASB codification research
20
10-24
7
Interest capitalization
15
10-25
7
Interest capitalization
15
10-26
7
Interest capitalization
15
10-27
7
Interest capitalization; multiple periods
20
10-28
8
Research and development
15
10-29
8
Research and development
10
10-30
8,9
IFRS; research and development
10
10-31
9
IFRS; research and development
15
10-32
1,4,6,7
Concepts; terminology
15
10-33
8
Software development costs
15
10-34
8
Software development costs
15
10-35
A
Oil and gas accounting [Based on Appendix]
10
CPA/CMA Learning Est. time
Exam Questions Objective(s) Topic (min.)
CPA-1
1
Acquisition costs; land
3
CPA-2
2
Acquisition costs; land and building
3
CPA-3
3
Acquisition cost; noninterest-bearing note
3
CPA-4
6
Nonmonetary exchange
3
CPA-5
7
Acquisition cost; self-constructed asset
3
CPA-6
7
Interest capitalization
3
CPA-7
8
Software development costs
3
CPA-8
8
Research and development
3
CPA-9
9
IFRS
3
CPA-10
9
IFRS
3
CMA-1
1
Acquisition costs; machinery
3
CMA-2
6
Nonmonetary exchange
3
CMA-3
6
Nonmonetary exchange
3
Learning Est. time
Problems Objective(s) Topic (min.)
10-1
1,2,3,4
Acquisition costs
10-2
1,2,7
Acquisition costs; land and building
10-3
1,4,6
Acquisition costs
10-4
1,8
Intangibles
10-5
1,3,6,8
Acquisition costs; journal entries
10-6
6
Nonmonetary exchange
10-7
6
Nonmonetary exchange
10-8
6
Nonmonetary exchange
10-9
7
Interest capitalization; specific interest method
10-10
7
Interest capitalization; weighted average method
10-11
8
Research and development
10-12
1,2,3,7
Acquisition costs; lump-sum acquisition;
noninterest-bearing note; interest capitalization
Star Problems
10-52 Intermediate Accounting, 8/e
Learning Est. time
Cases Objective(s) Topic (min.)
Judgment Case 10-1
1,3,6
Acquisition costs
Research Case 10-2
1
Restoration costs; asset retirement obligation
Judgment Case 10-3
7
Self-constructed assets
Judgment Case 10-4
7
Interest capitalization
Research Case 10-5
1
Goodwill
Real World Case 10-6
1
Property, plant, and equipment; intangibles;
Chico’s FAS
Judgment Case 10-7
1
Goodwill
Judgment Case 10-8
8
Research and development
Judgment Case 10-9
8
Research and development
Communication Case 10-10
8
Research and development
Communication Case 10-11
8
Research and development
Ethics Case 10-12
8
Research and development
IFRS Case 10-13
8,9
Research and development; comparison of U.S.
GAAP and IFRS; Siemens AG
Analysis Case 10-14
5
Fixed-asset turnover ratio; Pier 1 Imports
Judgment Case 10-15
8
Computer software costs
Real World Case 10-16
1,7
Property, plant, and equipment; Home Depot
Analysis Case 10-17
1,5
Reporting property, plant, and equipment and
intangible assets; PetSmart
Air France-KLM Case
9
IFRS; software development costs; research and
development; Air France-KLM
15
CPA Simulation 10-1 Interest capitalization