Exercise 12-17 Sandhill Company incurred the following costs during the current
ID: 2571995 • Letter: E
Question
Exercise 12-17 Sandhill Company incurred the following costs during the current year in connection with its research and development activities Cost of equipment acquired that will have alternative uses in future R&D; projects over the next 5 years (uses straight-line depreciation) Materials consumed in R&D; projects Consulting fees paid to outsiders for R&D; projects Personnel costs of persons involved in R&D; projects Indirect costs reasonably allocable to R&D; projects Materials purchased for future R&D; projects $290,000 57,000 130,000 139,000 47,000 34,000 Compute the amount to be reported as research and development expense by Sandhill on its current year income statement. Assume equipment is purchased at the beginning of the year. Total to be expensed for research and DevelopmentExplanation / Answer
Solution
Sandhill Company
Determination of the amount to be reported as research and development expense by the company on its current year income statement:
The amount to be reported as research and development expense in the current year income statement includes the following,
Depreciation on equipment $58,000
Materials consumed in R&D projects $57,000
Consulting fee paid to outsiders for R&D projects $130,000
Personnel costs of persons involved in R&D projects $139,000
Indirect costs reasonably allocated to R&D Projects $47,000
Total amount to be reported in current year income statement $431,000
Notes:
The equipment will have alternative uses in future and hence the entire cost is capitalized and the depreciation expense is the R&D expense.
Materials consumed in R&D projects relate to the current year R&D expense and hence expensed to R&D.
Consulting fee paid is related to R&D projects in current year and hence the same is expensed as R&D item.
Personnel costs of persons relates to current year R&D activities and hence the same is expensed as R&D item
Indirect costs allocated are current year R&D expenses and hence the same is expensed.
The benefit for all these cost items relates to current year and hence the corresponding expense is reported as an R&D expense in the current year income statement.
The materials purchased for future R&D projects are not consumed in current year and are held with the intention of future use. Hence, the same is treated as inventory and not as current year expense.
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