Thirsty plc makes a revolutionary type of can called Soak. The can has a resealable top which allows the can to be sealed after opening to prevent gas escaping. In January 2019 the idea for this new product was launched, and a loan of £5 million was obtained from Sunshine Bank in order to finance this project. The associated costs and activities for the year ended 31 May 2020 are as shown below: 01 June 2019 – 31 July 2019: £30,000 per month on market surveys to establish whether or not consumers would want such can. The market surveys suggest that there is a market for the can amongst environmentally aware consumers. 01 August 2019 – 30 September 2019: £100,000 for evaluation of a number of alternative prototypes and designs. End of September 2019: a design is chosen and engineers produce a plan which indicates that is technically possible to produce the Soak can. 01 October 2019 -31 January 2020: £1,300,000 was spent for the design and construction of a pilot manufacturing plant. This plant is not capable of operating on a scale economically feasible for commercial production. 01 February 2020 – 31 May 2020: £500,000 for testing of a pilot manufacturing plant. All expenditure incurred has been confirmed by the accounting department. Thirsty limited has applied to register the Soak can as a patent. Required: Discuss, with the reference to IAS 38: Intangible Assets, the correct accounting treatment for all the costs incurred in relation to the Soak can for the year ended 31 May 2020. (Hint use the definitions of “research” and “development”).- (300 WORDS)

Financial Accounting Intro Concepts Meth/Uses

14th Edition

ISBN:9781285595047

Author:Weil

Publisher:Weil

ChapterA: Appendix - Time Value Of Cash Flows: Compound Interest Concepts And Applications

Section: Chapter Questions

Problem 30P

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Thirsty plc makes a revolutionary type of can called Soak. The can has a resealable top which allows the can to be sealed after opening to prevent gas escaping. In January 2019 the idea for this new product was launched, and a loan of £5 million was obtained from Sunshine Bank in order to finance this project.

The associated costs and activities for the year ended 31 May 2020 are as shown below:

01 June 2019 – 31 July 2019: £30,000 per month on market surveys to establish whether or not consumers would want such can. The market surveys suggest that there is a market for the can amongst environmentally aware consumers.
01 August 2019 – 30 September 2019: £100,000 for evaluation of a number of alternative prototypes and designs.
End of September 2019: a design is chosen and engineers produce a plan which indicates that is technically possible to produce the Soak can.
01 October 2019 -31 January 2020: £1,300,000 was spent for the design and construction of a pilot manufacturing plant. This plant is not capable of operating on a scale economically feasible for commercial production.
01 February 2020 – 31 May 2020: £500,000 for testing of a pilot manufacturing plant.
All expenditure incurred has been confirmed by the accounting department.
Thirsty limited has applied to register the Soak can as a patent.

Required:

Discuss, with the reference to IAS 38: Intangible Assets, the correct accounting treatment for all the costs incurred in relation to the Soak can for the year ended 31 May 2020. (Hint use the definitions of “research” and “development”).- (300 WORDS)

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