. The Baltimore Corporation reported net income in Year One of $90,000 and in Ye
ID: 2600980 • Letter: #
Question
. The Baltimore Corporation reported net income in Year One of $90,000 and in Year Two of $140,000. The company spent $16,000 for research and development in Year One and another $24,000 for research and development in Year Two. The company follows the policy of capitalizing its research and development costs and then amortizing them over four years (using the half-year convention for the initial year). The straight-line method is used for amortization with no expected residual value. a. If U.S. GAAP is to be applied, what was the correctly reported net income for Year One? b. If U.S. GAAP is to be applied, what was the correctly reported net income for Year Two?
Explanation / Answer
a. $76,000
b. $123,000
Note: Per U.S. GAAP, research and development costs are expensed out in the year incurred.
Year 1 Year 2 Research and development costs $ 16000 24000 Amortization: Year 1 costs 2000 4000 ($16000/4 x 1/2) ($16000/4) Year 2 costs 3000 ($24000/4 x 1/2) Total amortization expense $ 2000 7000 Net income $ 90000 140000 Add: Amortization expense 2000 7000 Net income before amortization $ 92000 147000 Less: Research and development costs incurred $ -16000 -24000 Net income per U.S. GAAP $ 76000 123000Related Questions
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