Trecek Corporation incurs research and development costs of $682,000 in 2017, 30
ID: 2572033 • Letter: T
Question
Trecek Corporation incurs research and development costs of $682,000 in 2017, 30 percent of which relate to development activities subsequent to IAS 38 criteria having been met that indicate an intangible asset has been created. The newly developed product is brought to market in January 2018 and is expected to generate sales revenue for 10 years.
Assume that a U.S.–based company is issuing securities to foreign investors who require financial statements prepared in accordance with IFRS. Thus, adjustments to convert from U.S. GAAP to IFRS must be made. Ignore income taxes.
Required:
a. Prepare journal entries for research and development costs for the years ending December 31, 2017, and December 31, 2018, under (1) U.S. GAAP and (2) IFRS.
b. Prepare the entry(ies) that Trecek would make on the December 31, 2017, and December 31, 2018, conversion worksheets to convert U.S. GAAP balances to IFRS.
Explanation / Answer
a. As per IAS 38(IFRS), Research costs relating to the ddevelopment of an intangible asset are required to be recognised in the income statement for the period in which they are incurred. However, Cost relating to the Devepment of an intangible asset can be capitalized in the financial statements if the entity is able to demostrate:
(a). the technical feasibility of completing the intangible asset so that it will be available for use or sale.
(b) its intention to complete the intangible asset and use or sell it.
(c) its ability to use or sell the intangible asset.
In the given question, it is definite that newly developed product will start generating revenues from next year for 10 years. And therefore as per US GAAP, Development costs relating to same can be capitalized.
Journal Entry
Journal Entries under IFRS
Date
Particulars
Dr. Amount (in$)
Cr. Amount (in$)
31 Dec 2017
Intangible Assets under Development
TO Cash
($682,000 x 30%)
204,600
204,600
31 Dec 2017
Research Costs
TO Cash
477,400
477,400
01st Jan 2018
Intangible Asset
TO Intangible Asset under Development
(Being asset capitalized)
204,600
204,600
Amortization on Intangible
TO Intangible Assets
20,460
Accounting under US GAAP- Unlike IFRS, with the exception of certain internally developed computer software and directresponse advertising, all other development costs are expensed as incurred
Journal Entry under US GAAP
Journal Entries under US GAAP
Date
Particulars
Dr. Amount (in$)
Cr. Amount (in$)
31 Dec 2017
Research & Development Costs
TO Cash
682,000
682,000
b. Year end adjustment entry
Date
Particulars
Dr. Amount (in$)
Cr. Amount (in$)
31 Dec 2017
Intangible Asset under development
TO Research & Development cost
(Being adjustment entry for US GAAP to IFRS)
204,600
204,600
Jan 2018
Intangible Asset
TO Intangible Asset under Development
204,600
204,600
31 Dec 2018
Amortization on Intangible
TO Intangible Assets
20,460
20,460
Date
Particulars
Dr. Amount (in$)
Cr. Amount (in$)
31 Dec 2017
Intangible Assets under Development
TO Cash
($682,000 x 30%)
204,600
204,600
31 Dec 2017
Research Costs
TO Cash
477,400
477,400
01st Jan 2018
Intangible Asset
TO Intangible Asset under Development
(Being asset capitalized)
204,600
204,600
31 Dec 2018Amortization on Intangible
TO Intangible Assets
20,46020,460
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