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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Clonal Inc., a biotechnology company, developed and patented a diagnostic product called Trouver. Clonal purchased some research equipment to be used exclusively for Trouver and other research equipment to be used on Trouver and subsequent research projects. Clonal defeated a legal challenge to its Trouver patent and began production and marketing operations for the product. Clonal allocated its corporate headquarters’ costs to its research division as a percentage of the division’s salaries.

Required:

  1. 1. What is the definition of research and of development as defined by GAAP?
  2. 2. Briefly indicate the justification for the existing GAAP relating to R&D costs.
  3. 3. Explain how Clonal should report the equipment purchased for Trouver on its income statements and balance sheets.
  4. 4. Explain how Clonal should report the legal costs incurred in defending Trouver’s patent on its statement of cash flows.
  5. 5. Explain how Clonal should classify its corporate headquarters’ costs allocated to the research division on its income statement.

1.

To determine

State the definition of research and development under GAAP.

Explanation

Research and development costs: It refers to the expenditures spent on research, development, improvement or introduction of new products, processes, a new patent or even a copyright, that a company expects to get benefits. It is reported under the intangible asset in the balance sheet.

State the definition of research and development under GAAP as follows:

  • Research refers to the investigat...

2.

To determine

Specify the reason for the existing GAAP relating to research and development.

3.

To determine

Describe the way in which the company would report the purchase of research equipment for product T on its income statements and balance sheet.

4.

To determine

Describe the way in which the company should report the legal costs incurred in defending product T’s patent on its statement of cash flows.

5.

To determine

Describe the way in which the company should classify its corporate headquarters’ costs allocated to research division on its income statement.

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